Livens & Reed, PLLC

Estate planning: Can IRAs be protected in bankruptcy proceedings?

Investors in Texas who consider filing for bankruptcy may have questions about the protection of their Individual Retirement Accounts. Like the protection offered in bankruptcy against the seizure of Social Security benefits, pensions and 401(k)s, IRAs can also be safeguarded against creditors. However, an inflation-linked dollar limit will apply. It may be wise to update estate planning documents to reflect the chosen beneficiaries for the IRA, although they may not receive the same protection.

A significant advantage is that these funds will pass to the beneficiary without being included in probate. However, when it comes to bankruptcy, beneficiaries may not receive the same protection from creditors -- except if the beneficiary is the spouse. If that person files for bankruptcy after taking ownership of the IRA funds, the law no longer sees it as retirement funds, leaving it subject to seizure in bankruptcy proceedings.

For these reasons, it may not be wise for IRA investors to name their children as IRA beneficiaries. To prevent the child from losing the funds to creditors in the event of financial problems, the IRA funds can go into a trust. After establishing the trust, one can name the trust as the beneficiary of the IRA account. In that way, the IRA assets will be protected in bankruptcy proceedings.

IRA investors in Texas can have their questions about these issues answered by discussing their concerns with an experienced estate planning attorney. Even if beneficiaries are financially stable now, circumstances can change, and steps can be taken to protect them. Reviewing estate plans at regular intervals will allow modifications to accommodate changing goals and priorities.

Source:, "Estate Planning Tip: Creditor Protection for IRAs & Beneficiaries", Eric Dunner, Dec. 9, 2016

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