Inherited IRAs Not Excluded From Bankruptcy Estate – Supreme Court Clark v. Rameker (Sup Ct. 6/12/14) 113AFTR 2d 2014-889
Date posted: June 24, 2014
When and individual files for bankruptcy, they may exempt particular categories of assets from the bankruptcy estate. One such category includes certain retirement funds. The question presented is whether funds contained in an inherited individual retirement account (IRA) qualify as retirement funds within the meaning of this bankruptcy exemption. The Supreme Court holds that they do not.
An inherited IRA is a traditional or Roth IRA that has been inherited after its owner’s death. If the heir is the owner’s spouse, as is often the case, the spouse has a choice; he or she may “roll over” the IRA funds into his or her own IRA, or he or she may keep the IRA as an inherited IRA. When anyone other than the owner’s spouse inherits the IRA, he or she may not roll over the funds, the only option is to hold the IRA as an inherited account. Inherited IRAs do no operate like ordinary IRAs. Unlike a traditional or Roth IRA, an individual may withdraw funds from an inherited IRA at any time, without paying a tax penalty. Indeed, the owner of an inherited IRA not only may but must withdraw its funds. The owner must either withdraw the entire balance in the account within 5 years of the original owner’s death or take minimum distributions on an annual basis. And unlike with a traditional or Roth IRA, this owner of an inherited IRA may never make contributions to the account.
In 2000, Ruth Heffron established a traditional IRA and named her daughter, Heidi Heffron-Clark, as the sole beneficiary of the account. When Ms. Heffron died in 2001, her IRA – which was then worth just over $450,000 – passed to her daughter and became an inherited IRA. Ms. Heffron-Clark elected to take monthly distributions from the account. In October 2010, Ms. Heffron-Clark and her husband, petitioners in this court, filed a Chapter 7 Bankruptcy petition. They identified the inherited IRA, by then the worth roughly $300,000 as exempt from the bankruptcy estate. Respondents, the bankruptcy trustee and unsecured creditors of the estate, 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 concluded that the text and purposes of the bankruptcy code make clear that funds held in inherited IRAs are not retirement funds within the meaning of bankruptcy exemption.