A current issue before the U.S. Supreme Court is whether a debtor who inherits an IRA from a non-spouse, prior to a bankruptcy case, can claim the IRA as exempt in a bankruptcy case. The U.S. Supreme Court recently heard oral arguments on this issue in Clark v. Rameker and the Court’s opinion should be released by early Summer 2014.
Simply stated, the facts of the Clark case are as follows: Ms. Clark inherited an IRA from her mother; Ms. Clark rolled the funds into an IRA in her own name; years later, Ms. Clark and her husband filed a Chapter 7 bankruptcy for business reasons and Ms. Clark claimed her IRA as exempt under Sections 522(b)(3) and (d)(12) of the Bankruptcy Code; the Bankruptcy Trustee objected to Ms. Clark’s claimed IRA exemption, arguing that the funds in the IRA were not “retirement funds;” and the Bankruptcy Court ruled in the Trustee’s favor. Ms. Clark successfully appealed the decision at the District Court level. Thereafter, the Trustee appealed and the Seventh Circuit Court of Appeals reversed the District Court’s decision, holding that inherited IRAs are not exempt because they do not qualify as retirement funds – the funds are structured for current consumption and not long term retirement savings and there are different taxation rules between traditional and inherited IRAs. As a result, Ms. Clark filed an appeal with the U.S. Supreme Court. The U.S. Supreme Court decided to take the Clark case because there is a split of authority between the circuits on this issue, as the Fifth Circuit Court of Appeals as well as some other courts previously held that inherited IRAs are exempt.
The point of contention between the circuits is the interpretation of the statute, which must be resolved by the U.S. Supreme Court. Sections 522(b)(3) and (d)(12) provide “[r]etirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986” may be exempted. However, importantly, the statute does not explain the meaning of “retirement funds” and for whose retirement the IRA account had to be created.
Stay tuned for an updated blog once the Court’s decision is released!