Inherited IRA

Not an exempt “Retirement Fund” in the eyes of the Law

Attorney Eric Brown shares his knowledge of how inherited IRA’s factor in when filing for bankruptcy:

Just another example of a trap for the unwary in bankruptcy; the United States Supreme Court, on June 12th, 2014, came down with a decision that could put a damper on some debtors’ day and open some attorneys–particularly those who have not read this case–up to liability . Retirement funds are exempt under the law, and protected for the debtor from creditors and from the Trustee in bankruptcy. This is a safeguard that is an old standby. Usually, for a bankruptcy practitioner, it rolls off the tongue quite easily that, “yes, of course your retirement is safe for you to file bankruptcy”.

But, not so fast. The Supreme Court in Clark v. Rameker (2014) decided that this is not the case for IRA’s inherited by the debtor in bankruptcy. They decided that if someone passes away and leaves their IRA to a son or daughter, and that son or daughter later has to file bankruptcy, the proceeds of that IRA are not protected by the exemption. The Supreme Court reasoned that the nature of those funds is different in that they can be accessed immediately and therefore, allowing a debtor to protect them would be creating a “free pass” for the debtor to use the exemption, but then turn and withdraw the money for immediate consumption.

I saw firsthand how some trustees are interpreting this in my area. I observed a 341 hearing wherein the trustee saw that the debtor had rolled over her deceased mother’s IRA into her own IRA. The trustee asked the debtor’s attorney if he was familiar with the Clark v. Rameker decision. After he said that he was not, she went on to say that the IRA was non-exempt, citing the decision as authority. I don’t know how the trustee is going to get over the fact that, by rolling it over into her personal IRA, it surely took on some of the characteristics that the Supreme Court stated make an Inherited IRA distinct from one that is a qualified retirement fund of a Debtor that enjoys the protection of the exemption.

But alas, just another thing to be cautious of if you are a debtor in bankruptcy or a bankruptcy practitioner. You can no longer lean on the notion that all retirement funds are sacrosanct. There are always exceptions.

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