In its opinion in Clark v. Rameker, 573 U.S. ____ (2014), the United States Supreme Court ruled that inherited IRA accounts are not exempt under 11 U.S.C. § 522(b)(3)(C), and are subject to payment of creditor claims in a chapter 7 case.
In Clark, the debtor inherited an IRA from her mother. On filing bankruptcy, the debtor asserted an exemption in the IRA under 11 U.S.C. § 522(b)(3)(C). The debtor was a resident of Wisconsin and asserted exemptions under its exemption statute, pursuant to 11 U.S.C. § 522(b)(3)(A). However, because Wisconsin law does not provide an exemption for inherited IRA accounts, the debtor asserted an exemption for that account under 11 U.S.C. § 522(b)(3)(C), which provides an exemption for “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation” the recited sections of the Internal Revenue Code. The trustee objected to the exemption, and the bankruptcy court denied the exemption. The district court reversed, and was reversed in turn by the Seventh Circuit Court of Appeals. The Supreme Court granted certiorari in light of the conflict between the Seventh Circuit’s opinion and the opinion of the Fifth Circuit in In re Chilton, 674 F.3d 486 (5th Cir. 2012).
In reaching its conclusion that § 522(b)(3)(C) provides no exemption to inherited IRA accounts, the Court looked to three legal characteristics of inherited IRA accounts: first, the holder of an inherited IRA account may never invest additional money in the account; second, holders of inherited IRA accounts are required to withdraw money from the accounts, no matter how many years they are from retirement; and third, the holder of an inherited IRA account may withdraw the entire balance of the account at any time and for any purpose without penalty. The Court viewed exclusion of an inherited IRA from § 522(b)(3)(C)’s exemptions as consistent with the Code’s policy of protecting the debtor’s essential needs. The Court did not view an inherited IRA as essential for protecting a debtor’s needs: “[I]f an individual is allowed to exempt an inherited IRA from her bankruptcy estate, 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 Court’s decision, of course, does not completely resolve the issue of whether inherited IRAs can never be exempt, because the Bankruptcy Code allows debtors to exempt property that is exempt under applicable state law. Consequently, if a state provides for exemption of inherited IRA accounts, then the debtor may still assert the state exemption under § 522(b)(3)(A), and the Supreme Court’s decision in Clark would not prevent the allowance of such an exemption.