Inherited IRAs not protected in bankruptcy, Supreme Court rulesNews added by Benefits Pro on June 16, 2014
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By Nick Thornton

The question of whether the assets of an inherited IRA account are protected from creditors during bankruptcy proceedings has forever been put to rest.

On Thursday, the Supreme Court unanimously upheld a 7th Circuit decision that said inherited IRAs do not enjoy the protections of IRAs in bankruptcy proceedings.

The petitioner in Clark v. Rameker, Trustee, Hedi Heffron-Clark, inherited an IRA worth about $300,000 in 2001. According to Supreme Court documents, Heffron-Clark and her husband filed for Chapter 7 bankruptcy in 2010.

They sought to exclude the funds in the IRA from the bankruptcy estate using the “retirement funds” exemption under Section 522 of the Bankruptcy Code, which exempts tax-exempt retirement funds from a bankruptcy estate.

The bankruptcy court disagreed, siding with the trustee and creditors, saying the inherited IRA fund was not protected. The question was then put before U.S. District Court for the Western district of Wisconsin, where the court reversed the bankruptcy court, explaining that “the exemption covers any account in which the funds were originally accumulated for retirement purposes.”

But then the appeals court reversed the district court, drawing a line between the protections afforded an IRA account’s original beneficiary and one that was inherited.

The Supreme Court agreed with the 7th Circuit, eliminating any question of whether inherited IRAs are protected from creditors in bankruptcy proceedings: they are not.

In the unanimous opinion, Justice Sonia Sotomayor wrote, “the possibility that some investors may use their inherited IRAs for retirement purposes does not mean that inherited IRAs bear the defining legal characteristics of retirement funds. Were it any other way, money in an ordinary checking account (or, for that matter, an envelope of $20 bills) would also amount to ‘retirement funds,’ because it is possible for an owner to use those funds for retirement.”

Originally published on BenefitsPro.com
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