In the past it was thought that if you made an heir a beneficiary of your IRA, the money in the IRA would be safe from your heir's creditors after you passed away. This was because the inherited IRA was treated as retirement savings and not as current income. However, the United States Supreme Court recently ruled to the contrary.
As Insurance News Net points out, in an article titled “Court Decision Has Implications for Estate Planning,” the full implications of this court ruling are not yet clear. The court's decision leaves open the possibility that a surviving spouse named as the beneficiary of an IRA might still be able to treat the inherited IRA as retirement savings, but the court did not address that issue. For non-spousal beneficiaries of an IRA, it is clear from this Supreme Court ruling that in most states, inherited IRAs will be much easier for creditors to claim in bankruptcy proceedings or otherwise. Such an inheritance will be treated as income, not retirement savings.
If leaving an heir money in a way that is protected from the heir's creditors is an important component of your estate plan, then you need to speak to an estate planning attorney as soon as possible. If you rely on your IRA to accomplish your goals, as is common, then you will need to make other plans. There are several possibilities including a retirement trust, which is a trust designed to preserve retirement income. An attorney can help you consider other alternatives as well.
Reference: Insurance News Net (July 24, 2014) “Court Decision Has Implications for Estate Planning”