| June 12
June 12 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
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
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
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,"
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)