murthy vaniClark v. Rameker became a controversial case when the bankruptcy court, district court and 7th circuit court gave differing opinions on its outcomes concerning Bankruptcy Code Section 522(b)(3)(C). This section excludes retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.

Clark v. Rameker

Ms. Heffron-Clark and her husband filed for Chapter 7 Bankruptcy petition and tried to exclude $300,000 of the inherited IRA from the bankruptcy estate using the “retirement funds” exemption. They argued that an inherited IRA was a retirement account because it was set aside for retirement by the previous owner and continues to bear the legal characteristics of a retirement fund even after the death of the previous owner. The Bankruptcy Court concluded that an inherited IRA does not represent “retirement funds” and disallowed the exemption. A District Court reversed the decision stating that the funds were “retirement funds” as they retained the same character in the hands of the successor. The decision was subsequently reversed by the Seventh Circuit. The debtors finally appealed to the Supreme Court which granted certiorari to resolve the split between different courts over this issue.

In deciding whether the inherited IRA was a retirement account, the US Supreme Court noted three legal characteristics of inherited IRAs that led to the conclusion that funds held in such accounts were not retirement funds (1) the holder of an inherited IRA may not invest additional funds in the account. (2) owners of inherited IRAs are required to withdraw money from such accounts, no matter how many years away they may be from retirement (3) the holder of an inherited IRA may withdraw the entire balance of the account at any time without any penalty implications. Funds held in inherited IRAs accordingly constitute “a pot of money that can be freely used for current consumption,” 714 F. 3d., at 561, not funds objectively set aside for one's retirement.

By protecting funds in retirement accounts the Bankruptcy Code preserves debtors' ability to meet their basic needs and ensures that they have a “fresh start,” but by allowing that kind of exemption to an  inherited IRA account would convert the Bankruptcy Code's purposes of giving debtors a “fresh start,” Rousey, 544 U. S., at 325, into a “free pass,” Schwab, 560 U. S., at 791.

Additionally, the Court held that just because an inherited IRA bears the legal characteristics of a fund set aside for retirement at an earlier moment in time did not make it a retirement fund. Accordingly retirement fund exemption for an inherited IRA was denied.

Brandon C. Clark et ux., Petitioners v. William J. Rameker, Trustee, et al,U.S. Supreme Court; 13–299, June 12, 2014.


Vani Murthy, CPA MST is tax manager at Golbar and Associates.

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