The federal bankruptcy exemptions set forth in the Bankruptcy Code provide that certain “retirement funds” may be claimed as exempt from a bankruptcy estate, including traditional and Roth IRAs[1]. 

The U.S. Supreme Court recently held in Clark v. Rameker that an inherited IRA (inherited from a non-spouse) may not be claimed as exempt under the federal exemptions in a bankruptcy case, because an inherited IRA is fundamentally different from a traditional or Roth IRA. 

In Clark, the U.S. Supreme Court defined “retirement funds” as sums of money set aside for the day an individual stops working.  The U.S. Supreme Court articulated three legal characteristics of inherited IRAs that deem them not retirement funds: 1) the beneficiary of an inherited IRA cannot make any new contributions to the inherited IRA; 2) the beneficiary of an inherited IRA is required to withdraw the money no matter how far they are from retirement age – the Tax Code requires that the funds be withdrawn within five years of the owner’s death or the beneficiary must take minimum annual distributions each year; and 3) the beneficiary of the inherited IRA may withdraw the entire balance in the account at any time, for any purpose and without any penalty. 

The facts of the Clark case are straightforward.  Ms. Clark inherited an IRA from her mother and elected to take monthly distributions from the account.  Approximately 10 years later, Ms. Clark and her husband filed a Chapter 7 bankruptcy case and claimed the inherited IRA as exempt.  The bankruptcy trustee and the unsecured creditors objected to the claimed exemption, arguing that the funds in the inherited IRA were not “retirement funds,” which could be claimed as exempt. 

The Bankruptcy Court agreed with the Trustee and disallowed the exemption.  The District Court then reversed the ruling, stating that the funds were originally accumulated for retirement purposes.  The Seventh Circuit reversed the District Court’s ruling, holding that inherited IRAs represent an opportunity for current consumption, not retirement savings.  For the reasons explained above, the U.S. Supreme Court affirmed the holding of the Seventh Circuit, and ruled that a debtor cannot claim an inherited IRA as exempt retirement funds under the federal exemptions. 

Despite this ruling in Clark, most debtors in Florida are eligible to claim the Florida exemptions when they file a bankruptcy case.  Under Florida Statute § 222.201, Florida is an “opt out” state meaning that qualified Florida residents must claim Florida state law exemptions in a bankruptcy case and do not claim the federal bankruptcy exemptions.  The Florida legislature has determined that inherited IRAs may be claimed as exempt, pursuant to Florida Statute § 222.21.  So presuming a debtor in Florida qualifies to claim the Florida exemptions, the Clark case is not applicable. 

[1]11 U.S.C. § 522(b)(3)(C)

This blog is intended for informational purposes only and is not an exhaustive discussion.  It is important to consult with an attorney before filing a bankruptcy case to determine one’s eligibility and to determine the exemptions which will be applicable in that particular case.