Inherited IRA is included in bankruptcy estate.

• Position: Individual retirement account

The Supreme Court held that funds held in an inherited IRA are not retirement funds that are exempt from a bankruptcy estate.

Background

Heidi Heffron-Clark was the sole beneficiary of a traditional IRA account established by her mother. In 2001, her mother died, and the account passed to Heffron-Clark, becoming an inherited IRA. In October 2010, Heffron-Clark and her husband (the Clarks), filed a Chapter 7 bankruptcy petition. They identified the inherited IRA, by then worth roughly $300,000, as exempt from the bankruptcy estate under 11 U.S.C. [section]522(b)(3)(C), which exempts "retirement funds" held in certain specified tax-exempt accounts from a debtor's bankruptcy estate.

The bankruptcy trustee and unsecured creditors of the estate objected to the claimed exemption on the ground that the funds in the inherited IRA were not "retirement funds" within the meaning of the statute. The Bankruptcy Court agreed, disallowing the exemption (In re Clark, 450 B.R. 858 (Bankr. W.D. Wis. 2011)). The court concluded an inherited IRA does not contain retirement funds because, unlike with a traditional IRA, the funds in an inherited IRA are not segregated to meet the needs of, or distributed on the occasion of, any person's retirement.

The district court reversed, explaining that the exemption covers any account containing funds "originally" "accumulated for retirement purposes" (Clark v. Rameker, 466 B.R. 135 (W.D. Wis. 2012)). The Seventh Circuit reversed the district court's decision (In re Clark, 714 F.3d 559 (7th Cir. 2013)). Pointing to the different rules that apply to inherited and noninherited IRAs, the Seventh Circuit concluded that "inherited IRAs represent an opportunity for current consumption, not a fund of retirement savings."

The Fifth Circuit, for reasons similar to those of the district court in In re Clark, held in In re Chilton, 674 F.3d 486 (2012), that an inherited IRA is an asset that is exempt from a bankruptcy estate. The Supreme Court agreed to hear the Clarks' case to resolve the conflict between the Seventh Circuit and the Fifth Circuit.

The Supreme Court's Decision

The Supreme Court held that funds in an inherited IRA are not retirement funds under Section 522(b)(C)(3) of the Bankruptcy Code and thus Heffron-Clark's inherited IRA was not exempt from the Clarks' bankruptcy estate. The Court found that retirement funds are funds "set aside for the day an individual stops working" and that three legal characteristics of...