High Court Rules Inherited IRAs Are Not Exempt From Creditors in Bankruptcy Proceedings

In a unanimous opinion, the U.S. Supreme Court rules that funds held in an inherited individual retirement account (IRA) are not exempt from creditors in a bankruptcy proceeding because they are not retirement funds. Clark v. Rameker (U.S., No. 13-299, June 13, 2014).

Heidi Heffron-Clark inherited an IRA from her mother. Inherited IRAs must be distributed within five years, and Ms. Heffron-Clark opted to take monthly distributions. During the five-year period, Ms. Heffron-Clark and her husband filed for bankruptcy and claimed that the IRA, worth around $300,000, was exempt from creditors because bankruptcy law protects retirement funds.

The bankruptcy court found that the IRA was not exempt because an inherited IRA does not contain anyone's retirement funds. Ms. Heffron-Clark appealed, and the district court reversed, ruling that the exemption applies to any account containing funds originally accumulated for retirement. The Seventh Circuit Court of Appeals reversed, holding that the money in the IRA no longer constituted retirement funds, while the Fifth Circuit Court of Appeals decided in In re Chilton (674 F.3d 486 (2012)) that funds from an inherited IRA should be exempt. The U.S. Supreme Court agreed to resolve the conflict.

The U.S. Supreme Court affirms the Seventh Circuit's decision in Clark, holding that the funds held in inherited IRAs are not "retirement funds." In a unanimous opinion delivered by Justice Sotomayor, the Court finds that funds in an inherited IRA are not set aside for retirement because the holders of inherited IRAs cannot invest additional money in the account, are required to withdraw money from the account even though they aren't close to retirement age, and may withdraw the entire balance of the account at one time.

For the full text of this decision, go to: https://www.supremecourt.gov/opinions/13pdf/13-299_mjn0.pdf

Did you know that the ElderLawAnswers database now contains summaries of more than 2,000 fully searchable elder law decisions dating back to 1993?  To search the database, click here.