On June 12, 2014, the United States Supreme Court issued its unanimous decision in Clark v. Rameker, holding that funds in an individual retirement account (IRA) that a bankruptcy debtor obtained through inheritance are not "retirement funds" that the debtor may exempt from her bankruptcy estate.
Ruth Heffron created an IRA. When she died, the account passed to her daughter Heidi. Heidi and her husband later filed Chapter 7 bankruptcy and claimed the inherited IRA as exempt from their bankruptcy estate under 11 U.S.C. § 522(b)(3)(C), which provides that a debtor may exempt "retirement funds to the extent those funds are in a fund or account that is exempt from taxation" under the Internal Revenue Code. The bankruptcy trustee and unsecured creditors objected to this claimed exemption on the basis that the funds were not "retirement funds" within the meaning of the law.
The Supreme Court held that the funds in an inherited IRA are not set aside for the debtor's retirement and are not "retirement funds" under the law. The Court noted the following in support of its decision - First, unlike traditional IRAs, holders of an inherited IRA may never invest additional money in the account. Second, holders of inherited IRAs are required to withdraw money from the accounts, no matter how many years they are from retirement. And third, the holder of an inherited IRA may withdraw the entire balance of the account at any time and for any reason without penalty. This is not true of traditional IRAs.