(lawprofessors) -- Earlier this month, the US Supreme Court released an opinion holding that that funds held in inherited IRAs are not “retirement funds” for bankruptcy purposes. In Clark v. Rameker, the Court based this finding strongly on the fact that “[i]nherited IRAs do not operate like ordinary IRAs.”
The Clarks, during their bankruptcy proceeding, argued that an inherited IRA was exempt from the bankruptcy estate under Section 522 of the Bankruptcy Code.
The Code provides that tax-exempt retirement funds are exempt from a bankruptcy estate.
The creditors argued this was not the case, and the Bankruptcy Court agreed with the creditors.
The district court reversed, finding that inherited IRAs retained their character as retirement funds and remained exempt.
US Court of Appeals for the Seventh Circuit reversed that ruling, and the Supreme Court affirmed, agreeing that the inherited IRA funds were not initially set aside for the debtor's retirement, and thus are not retirement funds under the definition of the Bankruptcy Code.
This decision actually illuminates the importance and benefits of an IRA trust.
The trust has specific and narrow provisions that allow the trustee of the trust to manage the IRA for the benefit of the beneficiary, while at the same time preserve the ability to “stretch” the tax-deferred growth of the IRA over the life expectancy of the individual beneficiary.
