Debtor's Beware of Inherited Retirement Funds

Grandma passes away and you inherit her retirement funds.  If forced to file bankruptcy, will you be able to save the inheritance from the creditors?  
The bankruptcy court allows personal debtors in a Chapter 7 case to claim as exempt certain personal property.  Common exemptions are household items and equity in homes and cars.  Included as exempt from creditors are personal retirement accounts.  
Recently the U.S. Supreme court was asked whether a debtor can claim as exempt from creditors an inherited retirement account.  The answer was "no" in most cases.  Spouses who inherit a retirement account from their spouse are allowed to "rollover" the account into the living spouse's name.  Under this circumstance, the surviving spouse may claim the monies exempt.  Not exempt are inheritances outside the course of marriage, for example, parent to child.  
Here are some more details from the case: 
In 2001, daughter inherited $450,000 from an an IRA from her mother’s estate.  In 2010 the daughter and her husband filed chapter 7 bankruptcy.  They claimed the inheritance as exempt retirement funds.  The Chapter 7 trustee and unsecured creditors objected to the claimed exemption on the ground that the funds in the inherited IRA were not “retirement funds” within the meaning of the statute.  The Supreme Court held that the funds in an inherited IRA are not set aside for the debtor's retirement and thus are not "retirement funds" under the retirement exemption.  The Court found that the daughter was prohibited from investing additional money in the account.  Also, she was not required to take minimum annual distributions every year, but could withdraw the entire balance of the account at any time and for any reason without penalty.  As such, the Supreme Court held the account did not have the characteristics of a typical retirement account.  
Photo Credit:Quinn Dombrowski at Flickr