The U.S. Supreme Court ruled in June that inherited IRAs are not “retirement funds” exempt from a debtor’s bankruptcy estate. Unlike funds in other accounts, funds in inherited IRAs are not set aside for the purpose of retirement, the Court held.
An individual created an IRA and named her daughter as the beneficiary. The individual died and the beneficiary elected to take monthly distributions from the account. Sometime later, the beneficiary sought Chapter 7 bankruptcy protection. The beneficiary wanted to exclude the inherited IRA from the bankruptcy estate.
The dispute went first to the bankruptcy court, which ruled against the beneficiary, next to a federal district court, which ruled in favor of the beneficiary, and next to an appellate court. The Seventh Circuit Court of Appeals held that an inherited IRA is part of a debtor’s bankruptcy estate.
The decision by the Seventh Circuit created a split among the courts of appeal. The Fifth Circuit had previously held that an inherited IRA is excluded from a debtor’s bankruptcy estate. The Supreme Court agreed to hear the dispute.
Justice Sotomayor delivered the Court’s opinion on June 12. “The Bankruptcy Code does not define ‘retirement funds,’ so we give the term its ordinary meaning,” Justice Sotomayor wrote. This is properly understood to mean sums of money set aside for the day an individual stops working. The inquiry into whether a set of funds falls within this definition must be an objective one, Sotomayor added.
“Three legal characteristics of inherited IRAs lead us to conclude that funds held in such accounts are not objectively set aside for the purpose of retirement,” Sotomayor wrote. “First, 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 such accounts, no matter how many years they may be from retirement. Finally, the holder of an inherited IRA may withdraw the entire balance of the account at any time, and for any purpose, without penalty.” The Court concluded that inherited IRAs are not excluded from a debtor’s bankruptcy estate.
If you have any questions about inherited IRAs, protecting retirement assets in bankruptcy or the Supreme Court’s decision, please contact our office.
Clark v. Rameker, SCt., June 12, 2014