Inherited IRAs Protected in Bankruptcy?

iStock_000002558626SmallIn an important case for asset protection planners, estate planners and bankruptcy lawyers, the U.S. Supreme Court will hear a case coming out of the Seventh Circuit to determine whether an inherited Individual Retirement Account is an exempt asset under federal Bankruptcy law.

In general, bankruptcy law exempts (or protects) a debtor’s IRA and other ERISA qualified retirement accounts. A spouse will generally roll over an IRA account into his or her name. However, it is common for a person, usually a child, to inherit an IRA from a parent by being the named beneficiary on the account. The child could then have his or her own IRA and an additional inherited IRA.

In In re Clark, 714 Fc3d 559 (7th Cir. 2013), the Seventh Circuit held that the debtor’s inherited IRA was not an exempt asset on the basis that it did not qualify as “retirement funds” under 11 USC § 522(b)(3)(C). The court went on to indicate that an IRA constitutes “retirement funds” only if it is held for the owner’s retirement. The debtors in Clark, who were not retired, received monthly payment from the account and used the funds for regular expenses. This ruling differs from cases in both the Fifth and Eighth Circuits that hold an inherited IRA does qualify for bankruptcy protection because the funds were someone’s retirement at one time. The Supreme Court will hear the Clark case to resolve the split between the Circuits.

If the Supreme Court sees this issue the same way the Seventh Circuit does, that may mean additional planning, perhaps with the use of a trust, to protect an inherited IRA. Stay tuned.

By John Hugg

Sorry, comments are closed for this post.

Hugg and Associates LinkedIn