On June 12, 2014, the U.S. Supreme Court issued its decision in Clark v. Rameker, 537 U.S. __ (2014), resolving a difference between federal circuit courts on the issue of whether an inherited IRA is excluded from the bankruptcy estate under section 522(b)(3)(C) of the federal Bankruptcy Code, which exempts retirement funds from the bankruptcy estate. Recall that an inherited IRA is one that has come to a beneficiary by reason of surviving the participant whose retirement funds had been amassed during their lifetime for their own retirement.
The debtor in the Clark case had filed for bankruptcy and claimed the IRA she had inherited from her mother as an exempt asset and the bankruptcy trustee had objected. The 7thCircuit in Rameker v. Clark held that the funds in the account did not represent the debtor’s retirement funds, and thus were not exempt under section 522(b)(3)(C) of the federal Bankruptcy Code. The 5th Circuit had previously reached the opposite decision in In re Chilton in 2012, holding that any funds accumulated for retirement purposes were exempt. With its unanimous decision in Clark v. Rameker, the U.S. Supreme Court has sided with the 7th Circuit and disallowed any exemption for an inherited IRA, stating that it was unlike a traditional IRA or Roth IRA and did not contain the debtor’s retirement funds.
Many states, such as Alabama, have opted out of the federal bankruptcy exemptions and rely solely upon state exemptions. Some of those states, such as Missouri, have a specific statute that exempts an inherited IRA account from the bankruptcy estate. Alabama’s statute does not specifically address an inherited IRA, although section 19-3B-508 of the Alabama Code does specifically exempt from the operation of bankruptcy laws, benefits from a plan that constitutes a “qualified trust” as such term is used in section 401(a) of the Internal Revenue Code, and, circuitously, refers back to accounts under sections 408(a) and (b) of the Internal Revenue Code.
The federal taxation of inherited IRAs is certainly governed by section 408(a) of the Internal Revenue Code. However, in In re Navarre, 332 B.R. 24 (2004), a Bankruptcy Court in Alabama held that an inherited IRA was not exempt under an earlier version of Alabama’s exemption statute. Thus, it seems likely that an Alabama Bankruptcy Court will continue to hold that an inherited IRA is not exempt from a debtor’s bankruptcy estate, putting Alabama in line with the holding from the U.S. Supreme Court holding in Clark.