Supreme Court Holds that Inherited IRA Funds are not Protected in Bankruptcy

The Bankruptcy Code allows a bankrupt debtor to exempt “retirement funds” from his or her bankruptcy estate [11 U.S.C. § 522(b)(3)(C)].  This means that creditors cannot access such funds for payment of their debts.  In Clark v. Rameker, the Supreme Court placed a limitation on this exemption, holding that an inherited IRA fund does not qualify as “retirement funds” under the exemption statute.  Accordingly, an inherited IRA is not protected and is properly included as part of the bankruptcy estate.

Although this seems like a narrow decision, the Supreme Court’s reasoning is broad enough that it may extend to other funds that are traditionally considered retirement funds.  The Court held that inherited IRAs are not retirement funds because the holder of the IRA cannot invest additional money therein, because the holder is required to withdraw money regardless of how far the holder is from retirement, and because the holder can withdraw the entire balance without a penalty.  Because of these characteristics, the Court held that an inherited IRA did not warrant the protection provided by the Bankruptcy Code. 

This decision is noteworthy because the Court looked to the practical consequences of exempting these funds rather than their legal character.  Justice Sonia Sotomayor, writing for a unanimous court, observed that “retirement funds” are “properly understood to mean sums of money set aside for the day an individual stops working,” and that the funds at issue did not meet that definition.  Her decision represents a practical and somewhat pro-creditor perspective on bankruptcy law, which is unusual given that the law’s overall policy favors a fresh start to the debtor. 

If you have questions or concerns about the implications of this decision, please contact your Trust Fund counsel.

By Jolene Kramer | June 25, 2014

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