IRA and Bankruptcy

IRA and Bankruptcy

The U.S. Supreme Court just ruled that an inherited IRA is not protected in bankruptcy under the current bankruptcy laws. Here is a link to the case: Clark v. Rameker | U.S. Supreme Court 2014.

This not a question everyone deals with, but if it does affect you, it will be a big deal. It is important to understand the issue and explain clearly to your bankruptcy attorney how you came to own your own retirement accounts including IRAs.

This case hinged on the wording of 11 USC 522(b)(3)(c) which protects (exempts) “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation” under varying IRS code sections. There was no question this was a tax exempt asset, the main question was whether this was viewed as a “retirement fund” when it was inherited by the current owner.

As a Debtor’s attorney most of the time, I see the code from that angle. Were these retirement funds? Yes. Have they crossed the line and now are taxable? No. Thus, this retains its nature as a retirement fund. The Court disagreed by focusing more on how the accounts are treated under the new ownership. The rules change enough for an inherited IRA, that the Court held that this changed the nature of the asset enough to not be covered by the statute.

Though this can be frustrating to Debtor attorneys, this case is not a miscarriage of justice. The could have gone either way. I think people give property as an IRA for the sole purpose of protecting the hard earned retirement. I have done advised this myself. We always knew this was working its way through the system but hoped for a different outcome.

This means essentially, that if you want to protect your inheritance from bankruptcy, you are going to have to use a different method. Please give us a call to discuss your options.

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