An inherited individual retirement account (IRA) is one set up and funded by the owner, who has died and named someone as the beneficiary of the IRA. As the owner of an inherited IRA, the beneficiary may withdraw the IRA funds at will, and must start withdrawing the funds at some point, depending on who the beneficiary is and whether the owner died before or after age 70 1/2. When the Bankruptcy Abuse Prevention and Consumer Protection Act was enacted in 2005, it provided an exception to the bankruptcy rules for retirement accounts: $1,000,000 adjusted for inflation for IRAs and an unlimited exception for employer-sponsored plan balances. In the case of Clark v. Rameker, the US Supreme Court decided that inherited IRAs don’t count as retirement plans. They reasoned that beneficiaries can take distributions at any time, and generally must start taking them in the year after the owner’s death. So they didn’t look like retirement accounts. They could easily have found reasons to treat them as retirement accounts, but they chose not do so, in this case by a vote of 9-0. The solution: owners of inherited IRAs might be able to rely on state law exemptions from bankruptcy rules for inherited IRAs, for those states that have them, and the original owners might avoid the effect of this ruling by naming a trust as the beneficiary. Note that this decision probably doesn’t extend to the situation in which the surviving spouse is the beneficiary, because the surviving spouse can make the inherited IRA his or her own, which other beneficiaries cannot.
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