(Adds expert commentary; adds no-comment from Clarks' lawyer)
By Nick Brown
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
IRAs inherited by someone other than a spouse cannot be
considered retirement funds, because beneficiaries cannot invest
additional money or delay distributions until retirement.
The treatment of inherited IRAs in bankruptcy is gaining
relevance as Baby Boomers die and leave 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 and other creditors owed
After conflicting 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
A lawyer for the Clarks declined to comment. Attorneys for
Rameker did not respond to a request for comment.
Audrey Young, a director at tax and consulting firm
McGladrey, said the ruling creates a disincentive for people to
save money using IRAs.
Young, who has written on the case and believes inherited
IRAs should be protected, said she believes state legislatures
will be "inundated" with bills seeking to protect inherited
IRAs, a step seven states have already taken.
In the meantime, she said, people should put retirement
money in trusts. "We need to quickly get the word out to IRA
owners to designate spendthrift trusts as the beneficiaries of
their retirement plans," she said.
During arguments in March, Justice Elena Kagan stressed the
importance of the outcome, saying "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)