The United States Supreme Court recently unanimously ruled that inherited individual retirement accounts (IRAs) are accessible to creditors in bankruptcy. This means that if you inherit an IRA from somebody other than your spouse, it is not considered exempt retirement funds. The Court based its decision on the fact that a beneficiary of an inherited IRA cannot invest additional money or delay distributions until retirement.
The case before the high Court was Clark v. Rameker and it involved a dispute over a pizza shop owners’ bankruptcy. The Clarks filed bankruptcy after their pizza shop went out of business. Their primary asset was an IRA inherited from Mrs. Clark’s mother, which was valued at approximately $300,000. The trustee fought to gain access to the inherited IRA in order to pay the Clarks’ creditors.
The majority opinion, written by Justice Sonia Sotomayor, focused on the Bankruptcy Code’s goal of finding a balance between protecting a debtor’s “essential needs” and ensuring a creditor recovers the debt owed. The Court found that an inherited IRA was not an “essential need” of the debtor. The funds from this type of IRA could be used for frivolous purposes just as easily as they could be used for retirement security.
The ruling makes it extremely important for debtors with inherited IRAs to seek legal counsel before filing a personal bankruptcy case.
Please keep in mind that every bankruptcy matter is different. If you are considering filing for bankruptcy protection, and you would like to schedule a no-cost consultation to discuss your options, please contact our office by completing the form on this website or calling us at (954) 516-2566.