By Fredrick P. Niemann, Esq. of Hanlon Niemann, a Freehold, NJ Estate Planning Attorney

It’s fairly well known that a debtor can protect his or her assets from collection by creditors by placing them in their Individual Retirement Account (IRA). But, a new question has come up: Can a debtor exempt his or her inherited IRA from creditors and ex-spouses when that IRA is inherited from someone other than his spouse?

Recently, the U.S. Supreme Court answered the question when it held that a non-spousal inherited IRA was not per se exempt because it does not constitute a “retirement fund” under applicable federal law.

This ruling could have a significant impact on an individual’s asset protection planning. For many people, retirement accounts such as IRAs, Roth IRAs and IRA Rollovers represent a substantial portion of their life savings. Accordingly, protecting these accounts from creditors and predators and preserving it for beneficiaries is critical.

One optional strategy to provide creditor protection for a non-spouse beneficiary (ie., child, loved one) of an inherited retirement account (IRA, SEP, etc.) is by creating an asset protection trust and naming a trustee of that trust as the beneficiary of the retirement account instead of an individual. The trustee can distribute the income and corpus of the trust to the beneficiary in a controlled and protected manner.

It is now more important than ever to use trusts in conjunction with retirement accounts.   Such trusts must be drafted carefully in order to preserve the income tax-favored treatment of an inherited IRA.

This article applies to retirement accounts inherited by non-spouses. A spouse-beneficiary of a retirement account may, through a spousal rollover, continue to hold the account as a retirement fund exempt from his or her bankruptcy estate.

To discuss your NJ estate planning matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at Please ask us about our video conferencing consultations if you are unable to come to our office.