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Legal Alert - U.S. Supreme Court Rules That Inherited IRAs are Available to Pay Creditors

06/18/2014

By Bob L. Olson and Nathan G. Kanute

On June 12, 2014, the U.S. Supreme Court issued its opinion in Clark v. Rameker[1], opening up another source of recovery for creditors and Chapter 7 trustees in bankruptcy proceedings. In Clark, a Chapter 7 debtor inherited an IRA from her mother nearly 10 years before filing bankruptcy with her husband. Upon filing the bankruptcy petition, she claimed the inherited IRA as exempt under 11 U.S.C. § 522(b)(3)(C).[2] The Bankruptcy Court disallowed the exemption on the grounds that an inherited IRA, unlike a debtor’s own IRA, was not meant to provide for the retirement of the debtor. The District Court reversed, finding that the exemption was meant to protect funds that were originally meant for retirement, irrespective of the person for whom the funds were originally intended.[3] The Seventh Circuit Court of Appeals reversed the District Court on the grounds that inherited funds could be spent immediately and did not need to fund retirement expenses.[4]

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