If it was unclear whether an inherited individual retirement account (IRA) could be excluded from a New York bankruptcy, the U.S. Supreme Court has settled the issue. The topic came up late last year when the Court decided to hear the case. The lawsuit was between the bankruptcy petitioners, Heidi Heffron-Clark and Brandon Clark, and the trustee in their case, William Rameker. The petitioners’ business had failed, leaving them with $700,000 in debt; however, Heffron-Clark’s mother passed away and bequeathed to them a $300,000 IRA. The petitioners argued that the IRA was exempt because it was a “retirement fund” under the Bankruptcy Code, but the trustee believed the account wasn’t protected. A similar case came up in other states, leading to a split among federal circuit courts.
In a unanimous opinion delivered on June 12, the Court held that under § 522(b)(3)(C) of the Bankruptcy Code, inherited IRAs are not “retirement funds” that can be excluded in bankruptcy for three reasons:
- Inheritors may not invest more money into the IRA,
- They must withdraw money from the IRA even if they are not close to retirement, and
- They may withdraw the entire balance at any time without penalty.
These reasons distinguish inherited IRAs from retirement investments that are designed to protect debtors when they are no longer working. The Supreme Court added that because debtors could spend all of an inherited IRA after bankruptcy on unnecessary consumption rather than retirement protection, the funds should be distributed to creditors to protect their reasonable interests. The Court then rejected the debtors remaining, semantic arguments.
Technically this ruling does not mean inherited IRAs are never exempt in bankruptcy. A while back, I discussed options debtors in New York bankruptcy have for using exemptions to soak up excess cash that are applicable to inherited IRAs. New Yorkers who don’t take the homestead exemption can claim the lesser of $5,000 or $10,000 minus their personal property exemptions, plus a $1,000 wildcard exemption. Under the federal exemptions debtors can use a $1,225 wildcard exemption plus up to half of an unused homestead exemption ($11,500) for any property. These won’t protect a $300,000 IRA, unfortunately.
The ruling in Clark v. Rameker mostly resolves the disposition of an inherited IRA in New York bankruptcy, but debtors might be able to conserve some of it if they choose the federal exemptions rather than the state’s. Other factors might be involved, so it’s crucial to discuss your case with an experienced New York bankruptcy lawyer before deciding to file.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy attorney Brooklyn NY Bruce Weiner for a free initial consultation.