On June 12, 2014, the United States Supreme Court decided Clark v. Rameker, No. 13-299, holding that funds in an individual retirement account (IRA) that a bankruptcy debtor obtained through inheritance are not "retirement funds" that the debtor may exempt from her bankruptcy estate under 11 U.S.C. § 522(b)(3)(C).
Ruth Heffron established an IRA. When Ruth died, the account passed to her daughter Heidi. Heidi and her husband filed Chapter 7 bankruptcy. They identified the inherited IRA as exempt from their bankruptcy estate under 11 U.S.C. § 522(b)(3)(C), which provides that a debtor may exempt "retirement funds to the extent those funds are in a fund or account that is exempt from taxation" under enumerated sections of the Internal Revenue Code. The bankruptcy trustee and unsecured creditors objected to the claimed exemption on the ground that the funds were not "retirement funds" within the meaning of the statute.
The bankruptcy court disallowed the exemption, but the district court reversed on the ground that the exemption covers any account containing funds that were "originally" accumulated for retirement purposes. The Seventh Circuit reversed and disallowed the exemption, holding that the rules for inherited IRAs, unlike the rules for non-inherited IRAs, require the owner to withdraw the funds in the account (either within five years of the original owner's death or through minimum annual distributions), so inherited IRAs "represent an opportunity for current consumption, not a fund of retirement savings."
The Supreme Court affirmed the Seventh Circuit's decision, holding that the funds in an inherited IRA are not set aside for the debtor's retirement and thus are not "retirement funds" under the exemption in § 522(b)(3)(C). The Court emphasized three legal characteristics of inherited IRAs that support this conclusion. First, unlike traditional IRAs, which encourage additional investments, the holder of an inherited IRA may never invest additional money in the account. Second, holders of inherited IRAs are required to withdraw money from the accounts, no matter how many years they are from retirement. And third, the holder of an inherited IRA may withdraw the entire balance of the account at any time and for any reason without penalty. That is not true of traditional IRAs. In addition, the rationale for allowing a debtor to exempt retirement funds from the estate that is available to satisfy creditors' claims—i.e., ensuring that debtors will be able to meet their basic needs after age 59½ —does not apply to inherited IRAs, which the debtor can withdraw in their entirety at any age.
Justice Sotomayor delivered the opinion of the unanimous Court.
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