Are Inherited IRA Funds Exempt During Bankruptcy?


Are individual retirement account (IRA) funds protected from creditors during a personal bankruptcy proceeding?  The U.S. Supreme recently heard arguments in Clark v. Rameker, a bankruptcy case concerning inherited IRA funds.  According to an article in Digital Journal, the Supreme Court’s decision in this case “could have an impact on future bankruptcy cases across the U.S.” and could have significant implications for other courts interpreting the Bankruptcy Code.  
If you have questions about protecting your assets in a bankruptcy, it’s very important to speak with an experienced Illinois bankruptcy lawyer.  At the Emerson Law Firm, we have been assisting Chicago residents with bankruptcies for years, and we can answer your questions today.
Details of Clark v. Rameker
In 2010, a husband and wife, Heidi Heffron-Clark and Brandon Clark, filed a voluntary joint Chapter 7 bankruptcy when their a pizza shop failed.  At the time of filing for bankruptcy, the Clarks claimed an inherited IRA under the retirement funds exemption of Section 522 of the Bankruptcy Code.  When the Clarks filed for bankruptcy, they owed their landlord approximately $700,000, and they also owed additional money to mortgage lenders and other creditors connected to their small business.
How did the Clarks have funds from an inherited IRA?  Heidi inherited approximately $300,000 from her mother’s IRA after her mother, Ruth Heffron, passed away.  When she died in 2011, the IRA was worth about $300,000.  Heidi established a Beneficiary IRA (or inherited IRA), and she transferred the balance from Ruth’s IRA account into the Beneficiary IRA. In other words, the Clarks hadn’t created the IRA with their own funds, but rather, they inherited an account that was created with Ruth Heffron’s funds.
Naturally, the Clarks’ creditors and the bankruptcy trustee, William Rameker, objected to the exemption when the Clarks filed for bankruptcy and argued that an IRA should only be exempt when it has been created with funds created by the party or parties filing for bankruptcy.  Now, the U.S. Supreme Court will have to decide whether the IRA exemption under Section 522 of the Bankruptcy Code applies to an inherited IRA.  In short, does an inherited IRA constitute a “retirement fund” under Section 522 such that it is exempt when a debtor files for bankruptcy?  As the Legal Information Institute points out, this case has significant implications for both “debtors’ and creditors’ access to inherited IRAs once a debtor files for bankruptcy.”
Inherited IRAS and Exemptions Under 11. U.S.C. § 522(b)(3)(C)
The part of the Bankruptcy Code under scrutiny in this case, Section 522(b)(3)(C), exempts certain kinds of “retirement funds.”  Courts have been split about whether an inherited IRA counts as a “retirement fund” such that it is exempt under the Bankruptcy Code.  For example, a district court ruled in favor of the Clarks, but an appellate court held that IRA funds are no longer protected, or exempt, once they’re inherited.  In other words, retirement funds are only protected if they’re created with the debtor’s own funds.
Since § 522(b)(3)(C) doesn’t explicitly say that retirement funds must be the original property of the person or parties filing for bankruptcy, the U.S. Supreme Court will have to consider whether Congress actually meant for inherited IRAs to be exempt during bankruptcy proceedings.  At the same time, Congressional intent will be just one issue for the U.S. Supreme Court to consider before it issues a ruling.
No matter how the Court decides, this case shows how complicated Chapter 7 bankruptcies can be.  If you are filing for bankruptcy and have inherited funds, you’ll need an experienced Chicago bankruptcy attorney on your side.  Contact the Emerson Law Firm today to learn more.
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