What was exempt before you inherited it may not be after, according to a recent Supreme Court case.
Clark et ux v. Rameker et al centered around the Chapter 7 Bankruptcy of Heidi Hefron-Clark and her husband, Brandon. In 2001, the Clarks inherited a $450,000 IRA from her mother. When the couple later filed bankruptcy in 2010, they claimed the IRA (then worth approximately $300,000) was exempt property, pursuant to 11 U.S.C. 522(b)(3)(C). The trustee and unsecured creditors objected, arguing that the inherited IRA was not a “retirement account” within the meaning of the statute. The Bankruptcy Court disallowed the exemption. The Supreme Court agreed to review the case, to resolve a split between the Fifth and Seventh Circuits.
A unanimous decision by Justice Sonia Sontamayor focused largely on the ordinary meaning of a “retirement account.” An IRA, 401(k) or any similar defined contribution account is simply money that a worker sets aside in anticipation of retirement. Basically, the account owner worked to fund the account. An inherited IRA, according to the court, is more like a gift, and gifts are normally not exempt in bankruptcy proceedings.
The justices also discussed the legal elements of an IRA. They held that an earned and inherited IRA are different in several key areas:
- No additional deposits: The owner of an inherited IRA may never add more money to the account, so the device is clearly not an investment vehicle.
- Required periodic withdrawal: In fact, owners of these accounts are required to withdraw money from the IRA, no matter how far the owners are from retirement.
- Penalty-free complete withdrawal: The owner of an inherited IRA may withdraw all the money at any time for any purpose, without penalty.
This decision may serve as a precedent in some future disputes, if a trustee challenges an inherited asset in your possession, such as a house or car. An attorney can represent you in these proceedings, and be your advocate in front of the court.
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