The Bankruptcy Code allows debtors to exempt from their bankruptcy estate certain “retirement funds”, including amounts held in an individual retirement account (IRA) or Roth IRA. The Code is silent, however, on whether amounts held in an inherited IRA are subject to creditors’ claims in bankruptcy. The U.S. Supreme Court resolved that issue recently in Clarke v. Rameker, holding that funds held in inherited IRA accounts are not exempt from creditors’ claims.
The debtor in this case inherited her mother’s IRA and was receiving periodic distributions from the account. At the time of the debtor’s bankruptcy filing, the inherited IRA had just over $300,000 left in it. The debtor claimed that the exemption under the Bankruptcy Code for “retirement funds” covered her inherited IRA. Her creditors challenged this assertion, and ultimately, the U.S. Supreme Court agreed with them. The exemption for “retirement funds” does not apply to amounts in an inherited IRA.
An IRA, whether personal or inherited, may be one of the only sources of assets of the debtor in a bankruptcy proceeding. Creditors now have a clear means of attacking an attempt to exclude inherited IRA assets from the bankruptcy estate.