The Supreme Court made an important ruling in 2014 concerning inherited IRAs. In Clark v. Rameker , the Court unanimously held that unlike a self-funded IRA, an inherited IRA is not protected in bankruptcy.
When a debtor files bankruptcy, he may exempt certain things from his bankruptcy estate. Any property that falls under an exemption is not available for distribution to creditors. The exemption in question in this case allows debtors to protect “retirement funds to the extent those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code.” §§522(b)(3)(C),(d)(12). Those sections of the Internal Revenue Code include IRAs, Roth IRAs, and inherited IRAs.
The case heard by the Supreme Court involved a woman, Heidi Heffron-Clark, who declared bankruptcy in 2010. Heffron-Clark and her husband claimed that the IRA she inherited from her mother qualified as “retirement funds” and was exempted from her bankruptcy estate. This would mean that the IRA- worth about $300,000 at the time of their bankruptcy filing- would not be available to creditors.
The bankruptcy trustee and unsecured creditors filed suit against the Heffron-Clark and her husband, saying that they could not claim these funds as exempt. The bankruptcy court agreed. The inherited account, the bankruptcy court concluded, did not hold anyone’s “retirement funds.” The account was merely a source of revenue for Heffron-Clark. The case was appealed and eventually reached the Supreme Court.
Differences Between IRAs and Inherited IRAs
The Supreme Court pointed out the differences in an inherited IRA and a regular IRA. Unlike a regular self-funded IRA, a person who inherits an IRA can withdraw money at any time. In fact, funds must be withdrawn from an inherited IRA at least annually. Additionally, a person who holds an inherited IRA cannot contribute to the account. Accordingly, Heffron-Clark never contributed to the IRA in question in this case, and had withdrawn about $150,000 from it since 2001.
The Court then looked to the purpose of the exemption of retirement funds. The exemption is set out in the Bankruptcy Code so that debtors will be able to meet their basic needs during their retirement years. With an inherited IRA, funds must be withdrawn immediately. The Supreme Court said that the plain meaning of the Bankruptcy Code was that funds a person sets aside for their own retirement should be exempted, not funds that are inherited and can be used immediately. The Court concluded that inherited IRAs are not “retirement funds” and do not receive the same protection in bankruptcy.
If you have questions about your IRA and filing bankruptcy, contact one of our offices and set up an appointment to discuss with one of our attorneys.
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