U.S. Supreme Court: Inherited IRAs Not ‘Retirement Funds,’ Not Exempt in Bankruptcy

U.S. Supreme Court: Inherited IRAs Not ‘Retirement Funds,’ Not Exempt in Bankruptcy

 WASHINGTON, D.C. — (Mealey’s) The U.S. Supreme Court today ruled that funds held in inherited individual retirement accounts (IRAs) are not “retirement funds” within the meaning of the Bankruptcy Code because they represent an opportunity to use money immediately as opposed to a fund of retirement savings (Brandon Clark, et al. v. William Rameker, No. 13-299, Chapter 7, U.S. Sup.) [lexis.com subscribers may access Supreme Court briefs and the opinion for this case].


Brandon Clark and Heidi K. Heffron-Clark filed for Chapter 7 bankruptcy in the U.S. Bankruptcy Court for the Eastern District of Wisconsin in 2011 and claimed an exemption for an IRA that had passed to Heidi Heffron-Clark when her mother died.

The trustee, William Rameker, objected to the exemption, and the Bankruptcy Court ruled in favor of the trustee.  The couple appealed to the U.S. District Court for the Eastern District of Wisconsin, which reversed the Bankruptcy Court’s decision.

The trustee appealed to the Seventh Circuit U.S. Court of Appeals, which reversed the District Court’s ruling.  The Clarks appealed to the Supreme Court.

‘Retirement Funds’

Justice Sonia Sotomayor wrote for a unanimous court, which held that the ordinary meaning of “retirement funds” is properly under­stood to be sums of money set aside for the day an individual stops working; however, the legal characteristics of inherited IRAs provide “objec­tive evidence that they do not contain such funds.”

The court determined that the holder of an inherited IRA may never invest additional money in the account; that the holder is required to withdraw money from the accounts, no matter how far they are from retirement; and that the holder may withdraw the entire balance of the account at any time — and use it for any purpose — without penalty.

The “retirement funds” exemption found in 11 U.S. Code Section 522(b)(3)(C) should not be read in a manner that would convert the bankruptcy objective of protecting debtors’ basic needs into a “free pass,” the court said.


The court added that allowing debtors to protect funds in traditional and Roth IRAs ensures that debtors will be able to meet their basic needs during their retirement years.  By contrast, nothing about an inherited IRA’s legal characteristics prevent or discourage an individual from using the entire balance immediately af­ter bankruptcy for purposes of current consumption, the court said.

Furthermore, the court said the couple’s claim that funds in an inherited IRA are re­tirement funds because, at some point, they were set aside for re­tirement, conflicts with ordinary usage and would render the term “retirement funds,” as used in 11 U.S. Code Section 522(b)(3)(C), “superfluous.”

11 U.S. Code Section 522

Congress could have achieved the same result without specifying the funds as “retirement funds,” the court added.  The absence of the phrase “debtor’s interest,” which appears in many other exemptions found in 11 U.S. Code Section 522(b)(3)(C), does not indicate that that section of the Bankruptcy Code covers funds intended for someone else’s re­tirement, the court ruled.

The Clarks are represented by Kannon K. Shanmugam, Allison B. Jones and Julia H. Pudlin of Williams & Connolly in Washington and Dennis P. Bartell and S. Michael Murphy of Dewitt Ross & Stevens in Madison, Wis.  Rameker is represented by Danielle Spinelli, Craig Goldblatt, Kelly P. Dunbar and Daniel T. Deacon of Wilmer Cutler Pickering Hale & Dorr in Washington and Stephen L. Morgan, Jennifer M. Krueger and Erin A. West of Murphy Desmond in Madison.

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