U.S. Supreme Court Rules That Inherited IRAs are Available to Pay Creditors

by Snell & Wilmer

On June 12, 2014, the U.S. Supreme Court issued its opinion in Clark v. Rameker[1], opening up another source of recovery for creditors and Chapter 7 trustees in bankruptcy proceedings. In Clark, a Chapter 7 debtor inherited an IRA from her mother nearly 10 years before filing bankruptcy with her husband. Upon filing the bankruptcy petition, she claimed the inherited IRA as exempt under 11 U.S.C. § 522(b)(3)(C).[2] The Bankruptcy Court disallowed the exemption on the grounds that an inherited IRA, unlike a debtor’s own IRA, was not meant to provide for the retirement of the debtor. The District Court reversed, finding that the exemption was meant to protect funds that were originally meant for retirement, irrespective of the person for whom the funds were originally intended.[3]  The Seventh Circuit Court of Appeals reversed the District Court on the grounds that inherited funds could be spent immediately and did not need to fund retirement expenses.[4]

Relying on the text and the purpose behind the retirement fund exemption, the U.S. Supreme Court held that inherited IRAs are not “retirement funds” within the meaning of the exemption statute.  In so holding, the Court defined “retirement funds” as “sums of money set aside for the day an individual stops working.” The Court then applied an “objective” test to determine whether the legal characteristics of an inherited IRA account indicate that the account is one “set aside for the day an individual stops working.” Three characteristics of inherited IRAs prevented them, in the Court’s view, from qualifying for the exemption: (1) a holder of an inherited IRA cannot deposit additional funds; (2) withdrawal, either in whole or in minimal annual installments, is required from an inherited IRA no matter how close the holder is to retirement; and (3) the whole balance of an inherited IRA can be withdrawn at any time and for any purpose without penalty. 

The Court also reasoned that allowing the holder of an inherited IRA to exempt it from its creditors would not serve the purpose of the Bankruptcy Code, which is to provide the greatest recovery for creditors without leaving the debtor destitute. Exempting an inherited IRA would not guarantee the provision for the debtor’s basic needs in retirement, but would rather amount to a cash windfall for the debtor at the expense of creditors.

One interesting area left open by the Court’s opinion involves IRAs that have been inherited by a spouse. The Court notes early in the opinion that a spouse may roll over an inherited IRA into his or her own IRA account or keep it as an inherited IRA.  Would a rolled-over inherited IRA be considered exempt retirement funds?  Would it matter if the surviving spouse in bankruptcy was over 59 ½ and could remove the funds without penalty? These are questions that will have to wait for the next case.


[1] See Slip Opinion.

[2] The Court notes that the exemption in § 522(b)(3)(C), for debtors who proceed under their state law exemptions, uses the exact same language as the exemption in § 522(d)(12), for debtors who proceed under the federal exemptions.  It should be assumed that the opinion in Clark will apply to debtors proceeding under the federal exemptions.

[3] See In re Clark, 466 B.R. 135 (WD Wisc. 2012).

[4] See In re Clark, 714 F.3d 559 (7th Cir. 2013).

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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