Lynn Brenner's Family Finance

Can my creditors seize an IRA I inherited from my mother?

Q: I have an inherited IRA from my mother, who passed away several years ago. I also have credit card debt that I cannot pay due to being unemployed. I use the IRA for total support. Can the credit card company invade my IRA if they get a judgment against me? -- AB New York City

 

A: In some states the answer is no; in others it's yes. But the answer for New York residents is still unclear, says Seymour Goldberg, a Melville New York estate lawyer.

The extent to which IRAs are protected from creditors depends on state law.

There are nine states that specifically shield inherited IRAs from creditors. 

In several other states, however, courts have held that inherited IRAs don’t qualify for protection from the beneficiary’s creditors. The question hasn't yet been argued in a New York court, Goldberg says.

New York law protects an IRA from its owner's creditors, but it says nothing about inherited IRAs.

There's a difference.

It’s natural for you to refer to this inherited IRA as yours. But technically, it isn’t yours. It’s still your late mother’s IRA. You are merely the beneficiary, says Ed Slott, a Rockville Centre NY tax accountant and IRA expert.

One difference, for example, is that if it were your own IRA, you could name a beneficiary. Since it's an inherited IRA, you cannot.

When you inherit a spouse’s IRA, you can make it your own by transferring it into a new IRA in your own name.

But every other beneficiary must keep an inherited IRA in the original owner's name to retain its tax-deferred status. If Fred Smith inherited his mother Mary Smith's IRA when she died on January 1, 2006, the account should be titled: `Mary Smith IRA (deceased 1/1/06) for the benefit of Fred Smith’.

 

DO WE HAVE TO PAY OUR LATE FATHER's Credit Card Debts?

Q: My father passed away last year. My mother, who was on Medicaid, passed away in January. My father had credit cards which only he signed for. We've been getting letters from the credit card companies, saying that they'll settle for 80% of the bill. What should we do? --SD, via email

                                                                                                                                   

A: Don't pay anything unless they can show that your mother co-signed for the credit cards.

The fact that your late father's credit card issuers have offered to settle for partial payment doesn't mean they're actually entitled to anything, says Stephen J. Silverberg, an East Meadow New York estate lawyer.

Bereaved survivors very often assume that they are legally obligated to pay the debts of  their deceased relative -- a mistaken assumption that is often shamelessly encouraged by creditors, as your experience shows.

In fact, however, any legitimate debts incurred by your late mother must be paid by her estate – the assets she left when she died. Although that might result in a smaller legacy for you and your siblings, you have no legal obligation to dig into your own pockets to pay her debts.

(And as I've explained in earlier posts, creditors don't get a crack at  everything a decedent leaves.  They cannot  recover their money from assets with named beneficiaries, like Individual Retirement Accounts or 401(k) accounts, or from life insurance policies, for example,  or from assets that were owned jointly with someone else.  Accounts with named beneficiaries go to those beneficiaries, and jointly-owned assets go to the surviving joint owners.)

But if your mother didn't co-sign for your father’s credit cards, her estate doesn't owe these card issuers anything at all.

It is true that by state law, spouses are legally responsible to pay for each other's ‘necessities’.  That means  that the extent that your father's credit card debts were for food, clothing, shelter or medical bills, the card issuers can argue that your mother's estate is liable for them.

"If so,  let them make that argument in Surrogate's Court," says Silverberg. "I doubt they'll show up."

 

TAP IRA TO PAY OFF DEBTS?

Q: My husband is 80 and I am 72. Our only asset is his IRA, which is worth $30,000. Our total income from Social Security is $1,630. We also withdraw $300 a month from the IRA. We have $7,000 in credit card debt. Would it be wise to take $7,000 from the IRA to pay off the cards? -- CS, via email

A: I don't think so. A $7,000 IRA withdrawal wouldn't be taxable in your case, but it would take a huge bite out of money that you need for your basic living expenses. 

       

For younger people, paying off credit card debt is a high priority. A big balance hurts your credit score, making it harder to rent an apartment, to get a mortgage or a car loan, even to land a job. Paying off debt is also important for older people who can afford to leave an inheritance for their children. When you die, your debts are paid out of your estate. Depending on your assets (some are protected from creditors) that can mean less for your survivors. 

       

But tapping an IRA is a very expensive way for most people to pay debts because IRA withdrawals are taxable.

       

Your situation is quite different. 

       

You have no taxable income, says Barry C. Picker, a Brooklyn tax accountant and financial planner. Social Security benefits aren't taxable to a married couple filing jointly whose your annual 'provisional income' is less than $32,001. 'Provisional income' is half your Social Security benefit, plus all your other income -- including tax-exempt income, pension income and withdrawals from your retirement accounts. Your provisional income is $13,380 -- $3,600 from your IRA plus $9,780 (half your Social Security benefits). 

       

Even if you increase your IRA withdrawal by $7,000 this year to pay off your credit card debt, your 'provisional income' would only be $20,380. So your Social Security income still wouldn't be taxable; and the tax on the $10,600 IRA withdrawal would be more than offset by your personal exemptions and standard deduction.

       

But your risk isn't a credit history that will prevent you from getting a mortgage, a job, or a student loan. Your big risk is running out of money. If you paying off your debt with 25% of your IRA, you'll probably be forced to run up new credit card balances just to cover your living expenses.  

       

In your case, it's wiser to keep making minimum, on-time credit card payments. (From a card issuer's viewpoint, your minimum payments have value. They're predictable cash flow.) The worst-case scenario: The issuer might raise your interest rate, which would boost the minimum payment, says Greg McBride, senior analyst at bankrate.com, a personal finance website. But that's a risk worth taking, he adds.

       

You should also know that New York law protects your husband's IRA from his creditors. Even if he filed for bankruptcy, they couldn't seize any part of the account to pay his debts. And if you inherit the IRA as his beneficiary, it will enjoy the same protection from your creditors. 

       

Under current New York law, a spouse is the only IRA beneficiary who gets that protection. The law doesn't actually protect inherited IRAs from creditors, says Seymour Goldberg, a Melville estate lawyer. Spouses are the exception because an IRA left to a spouse isn't considered an inherited IRA. The reason: You can roll your deceased spouse's IRA into a brand-new IRA of your own. By contrast, a non-spouse beneficiary must maintain an inherited IRA under the name of its deceased owner. Goldberg says anyone wishing to leave an IRA to a non-spouse who may be vulnerable to creditors can protect the account by leaving it to an irrevocable trust for that person's benefit.