Opinion analysis: No protection for inherited IRAs in bankruptcy
on Jun 12, 2014 at 9:24 pm
When Ruth Heffron died in 2001, her individual retirement account went to her daughter, Heidi Heffron-Clark. Nearly ten years later, Heffron-Clark and her husband declared bankruptcy. They contended that the inherited IRA – then worth about $300,000 – was not part of the bankruptcy estate, and therefore shielded from their creditors, because it was the kind of “retirement funds” that the Bankruptcy Code exempts from the estate. Today the Court rejected that argument, and affirmed the decision of the Seventh Circuit, in a unanimous and straightforward eleven-page opinion by Justice Sonia Sotomayor in Clark v. Rameker.
The Court based its decision on the “text and purpose of the Bankruptcy Code,” which in its view make “clear” that funds in inherited IRAs are not “retirement funds.” The Court started with the ordinary meaning of the phrase “retirement funds,” which it interpreted as money “set aside for the day an individual stops working.” Inherited IRAs do not meet this description, the Court explained, because someone who inherits an IRA may not add funds to the account; to the contrary, she must withdraw money from the account, even if her own retirement is still many years away, and can in fact withdraw all of the money in the account without paying a penalty.
Turning to the purpose of the Bankruptcy Code, the Court emphasized that shielding traditional and Roth IRAs from creditors “help[s] to ensure that debtors will be able to meet their basic needs during their retirement years.” But the same would not be true for inherited IRAs, the Court observed: under the Bankruptcy Code, a debtor could “us[e] the entire balance of the account on a vacation home or sports car immediately after her bankruptcy proceedings are complete.”
The Court’s unanimous and concise opinion would suggest that the Justices saw this as an easy case. However, that suggestion is belied somewhat by (as Ronald Mann reported) the spirited questioning for both sides at oral argument. But even if some Justices, like Mann, may have once regarded the interpretation of the phrase “retirement funds” as a close one, in the end they obviously coalesced around one reading of the phrase. And, of course, Congress is free to disagree with that reading – a development that, even if it happens, likely would not come in time to help Heidi Heffron-Clark but would result in a different outcome for others like her.
