Inherited IRAs in play for bankruptcy creditors: USSC

[jg]

BY NICK BROWN
Thu Jun 12, 2014 1:51pm EDT
"In a unanimous opinion, the nation's highest court held that IRAs inherited by someone other than a spouse cannot be considered retirement funds, because beneficiaries cannot invest additional money or delay distributions until retirement."
http://www.reuters.com/article/2014/06/ ... TA20140612

[Famspear]

From the Supreme Court’s opinion:

Petitioners’ primary argument is that funds in an inherited IRA are retirement funds because—regardless of whether they currently sit in an account bearing the legal characteristics of a fund set aside for retirement—they did so at an earlier moment in time. After all, petitioners point out, “the initial owner” of the account “set aside the funds in question for retirement by depositing them in a ”traditional or Roth IRA. Brief for Petitioners 21. And “[t]he [initial] owner’s death does not in any way affect the funds in the account.” Ibid.

We disagree. In ordinary usage, to speak of a person’s “retirement funds” implies that the funds are currently in an account set aside for retirement, not that they were set aside for that purpose at some prior date by an entirely different person. Under petitioners’ contrary logic, if an individual withdraws money from a traditional IRA and gives it to a friend who then deposits it into a checking account, that money should be forever deemed “retirement funds” because it was originally set aside for retirement. That is plainly incorrect.

--from Clark v. Rameker, p. 8, slip op., case no. 13–299, U.S. Supreme Court (June 12, 2014).

[Famspear]

I believe that an inherited IRA could still be exempt in bankruptcy if the debtor is claiming the exemption under a state statute by way of Bankruptcy Code section 522(b)(3)(A) -- if the state statute has language similar to that found in Texas Property Code section 42.0021.

Section 42.0021 exempts (among other things) inherited IRAs and inherited Roth IRAs, but contains no specific language requiring that these IRAs be considered "retirement funds."

The holding in Clark v. Rameker relates only to a debtor's claim for exemption of an inherited IRA under 522(b)(3)(C), which statute contains the "retirement funds" language. The debtors in that case were claiming under 522(b)(3)(C), not under 522(b)(3)(A).

To be more specific: neither 522(b)(3)(A) nor Texas Property Code section 42.0021 contains any express language indicating that an IRA (whether inherited or not) must be a "retirement fund" to be exempt. Further, as amended through September 1, 2013, Texas section 42.0021 specifically exempts "inherited" IRAs and "inherited" Roth IRAs.

So, a practitioner in Texas (or in a state having a provision similar to Texas Property Code section 42.0021) should consider this when deciding how to advise the client to claim exemption for an inherited IRA.