Inherited IRAs in play for bankruptcy creditors -US high court

June 12 Thu Jun 12, 2014 12:14pm EDT

June 12 (Reuters) - The U.S. Supreme Court on Thursday said inherited individual retirement accounts are not protected from creditors in bankruptcy, in a ruling that impacts one of the most popular ways to save for retirement.

In a unanimous opinion, the nation's highest court held that an IRA inherited by someone other than a spouse cannot be considered a retirement fund, because its beneficiary cannot invest additional money and must make distributions within a set number of years.

The treatment of inherited IRAs in bankruptcy is gaining relevance as Baby Boomers die and leave their assets to their children.

A set of 2005 bankruptcy law amendments protect retirement accounts from the reach of creditors. The Supreme Court was asked to decide if Congress intended those protections to extend to inherited IRAs in Clark v. Rameker, a dispute over the bankruptcy of a small-town pizza shop owner in Soughton, Wisc.

Heidi Heffron-Clark and her husband, Brandon Clark, declared bankruptcy in 2010 after the shop closed. The Clarks' main asset was about $300,000 in an IRA inherited from Heffron-Clark's mother. William Rameker, the trustee administering the Clarks' estate, wanted to get his hands on the money for the benefit of landlords, banks and other creditors owed about $700,000.

After back-and-forth rulings through multiple appeals, the Supreme Court heard arguments in March in an effort to clear up inconsistencies on the issue in different courts.

In an opinion penned by Justice Sonia Sotomayor, the high court said the bankruptcy code is designed to strike a balance between ensuring creditor recoveries while protecting a debtor's "essential needs."

The justices determined an inherited IRA did not fall within the scope of an essential need the way retirement security did.

"Nothing about the inherited IRA's legal characteristics would prevent (or even discourage) the individual from using the entire balance of the account on a vacation home or sports car immediately after her bankruptcy proceedings are complete," the ruling said.

Lawyers for both the Clarks and Rameker did not respond to requests for comment.

Justice Elena Kagan underscored the importance of the outcome during oral arguments in March, saying inherited IRAs "are not arcane accounts.

"Tons and tons of people have IRAs, and they die every day," Kagan said.

The ruling affirms a decision last year authored by Frank Easterbrook, the economic scholar and chief judge for the 7th U.S. Circuit Court of Appeals. Easterbrook's ruling was at the time contrary to prevailing case law in other circuits. (Reporting by Nick Brown; editing by Andrew Hay)

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