High Court to Rule on Retirement Fund Exemption

by Bond Schoeneck & King PLLC

In Clark v. Rameker, the United States Supreme Court recently heard argument to decide the issue of whether an inherited non-spousal individual retirement (“IRA”) account represents exempt “retirement funds” under §522 of the Bankruptcy Code (11 U.S.C. § 522).


Ruth Heffron established an IRA naming her daughter, Heidi Heffron-Clark, as the sole beneficiary.  Ruth died in 2001 and the account, valued at roughly $300,000, passed to Heidi.  After her mother’s death, Heidi then established a Beneficiary IRA (the “Inherited IRA”) and transferred the balance from her mother’s IRA to the Inherited IRA.  In October of 2010, Heidi and her husband, Brandon Clark, filed for Chapter 7 bankruptcy protection and claimed the Inherited IRA as exempt pursuant to 11 U.S.C. § 522(b)(3)(C), which exempts “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation” under certain provisions of the Internal Revenue Code.

The bankruptcy trustee, William Rameker, and certain creditors thereafter objected to the claimed exemption by the Clarks for the Inherited IRA.  The bankruptcy court sustained Rameker’s objection and held that the Inherited IRA was not exempt under § 522 because the account no longer represented “retirement funds” following Ruth Heffron’s death.  The district court, however, reversed, finding that the term “retirement funds” refers to “any account that contained such funds, as long as the funds had been accumulated for retirement purposes originally.”  On appeal, the Seventh Circuit Court of Appeals disagreed with the district court’s ruling – and agreed with the bankruptcy court’s original ruling – holding that the Inherited IRA was not exempt because the account did not represent anyone’s “retirement funds.”  Because there is a split of circuit authority over whether non-spousal inherited IRAs are exempt in bankruptcy proceedings, the Supreme Court granted certiorari on November 26, 2013 and heard argument on the appeal on March 24, 2014.


The case largely depends on the Court’s interpretation of the term “retirement funds” and Congress’s intent in drafting § 522 of the Bankruptcy Code.

The Clarks and their supporters argue that the plain language of the “retirement funds” exemption contained in 11 U.S.C. § 522 exempts funds that have been set aside for retirement and are tax-exempt.  They urge that this exemption applies to an Inherited IRA, because it was originally set aside for retirement and it is a tax-exempt account.  The Clarks argue that the plain language of this exemption (i) is consistent with Congress’s intent to create a uniform exemption for all types of tax-exempt retirement accounts, and (ii) furthers a number of other legislative objectives, such as protecting tax-favored retirement plans not already under federal protection, allowing beneficiaries to use Inherited IRAs as long-term financial planning tools, and to encourage individuals to save for retirement.

Rameker, meanwhile, argues that the funds held in Inherited IRAs are not “retirement funds,” and, as such, should not be exempt under § 522.  He posits that Congress created the bankruptcy exemptions to give debtors a fresh start, not to protect accounts like Inherited IRAs, which hold liquid assets that can be used at any time and are not specifically set aside for retirement by the account holder.  The bankruptcy trustee argues that Congress imposed clear limitations by expressly exempting only “retirement funds” held in retirement accounts.  He points out that Inherited IRAs differ from traditional IRAs in that Inherited IRAs: (1) do not incur a tax penalty on the early withdrawal of funds; (2) have special required minimum distribution rules; and (3) cannot augment the beneficiary’s own retirement fund.  Thus, according to Rameker, these accounts are not a “retirement fund” contemplated by § 522.

What’s At Stake?

Clark v. Rameker provides the Supreme Court with an opportunity to resolve a split of authority among the circuits and to conclusively determine whether non-spousal Inherited IRAs are an exempt asset of a debtor’s bankruptcy estate.  The Court’s decision will have broad implications on parties’ access to funds in these accounts during bankruptcy proceedings, and could impact estate planning and inheritance decisions.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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