The Supreme Court has recently issued a ruling with major implications for inheritors of retirement accounts. In a unanimous decision rendered on June 12th, the U.S. Supreme Court ruled in Clark v. Rameker that an inherited retirement account cannot be exempted from an individual’s bankruptcy estate under the “retirement funds” exemption of 11 USC §522(b)(3)(C). It is well settled law and practice that 401Ks, IRAs and Roth IRAs (among other “qualified accounts”) are exempt under bankruptcy law and, therefore, may not be liquidated for the benefit of creditors. However, as the Supreme Court ruled, this exemption applies only to the account holder and not such account holder’s beneficiaries.
The case involved a daughter that inherited her mother’s IRA in the approximate amount of $450,000.00. Years later, the daughter had continued to maintain the account as an inherited IRA, taking periodic distributions, and filed for Chapter 7 bankruptcy seeking to exempt that full balance of the account under the traditional “retirement funds” bankruptcy exemption. The bankruptcy Trustee and creditors objected to the exemption as inapplicable. The Supreme Court eventually affirmed the Seventh Circuit Court’s ruling that the exemption should be disallowed.
The Court’s reasoning behind the unanimous ruling related to the relatively unfettered access a beneficiary has to the retirement funds at any age as opposed to the various protective age restrictions and tax penalties placed on the original account holder’s access to the funds. Additionally, Justice Sotomayor, in her opinion, noted that while an inherited IRA account may have initially been funded with money intended for retirement, the beneficiary of the inherited retirement account is actually required to commence distributions from the account regardless of age and may withdraw the entire account without penalty, thereby essentially changing the nature of the account as “for retirement.”
The case seems to even impact spouses, who under the law have traditionally enjoyed more favorable treatment as a retirement account inheritor. However, spouses do retain a right to “roll-over” a spousal inherited retirement account into their own IRA, thereby affording protection from the implications of this recent ruling.
Getting Legal Help with New Hampshire Retirement Planning
Estate planning with retirement funds can be tricky at times, especially when attempting to balance the tax benefits of a retirement account with the potential personal and financial struggles your beneficiaries may encounter. Our New Hampshire retirement planning team at DeBruyckere Law Offices can help to come up with the best strategy to afford your beneficiaries with the most protection when inheriting retirement funds.