Thursday, June 12, 2014

Inherited IRAs not protected

The U.S. Supreme Court has ruled, in the case of Clark v. Rameker, that inherited IRAs cannot be protected in a bankruptcy filing. As a result, IRAs that have been inherited from a deceased worker (the "participant") are available as assets to pay creditors.

The opinion for a unanimous court, written by Justice Sotomayor, focuses on key differences between IRAs owned by the participant and inherited IRAs:
"Inherited IRAs do not operate like ordinary IRAs. Un­like with a traditional or Roth IRA, an individual may withdraw funds from an inherited IRA at any time, with­out paying a tax penalty. §72(t)(2)(A)(ii). Indeed, the owner of an inherited IRA not only may but must with­draw its funds: The owner must either withdraw the entire balance in the account within five years of the original owner’s death or take minimum distributions on an annual basis. . . And unlike with a traditional or Roth IRA, the owner of an inherited IRA may never make con­tributions to the account. 26 U. S. C. §219(d)(4)."
The code, she noted, does not define the term "retirement funds." Considering the ordinary meaning of the term (a Scalia-like endeavor, it would seem), it would mean funds set aside for the owner's retirement. Disregarding a particular owner's subjective intention, and focusing on the objective characteristics, she noted three factors:
"Three legal characteristics of inherited IRAs lead us to conclude that funds held in such accounts are not objec­tively set aside for the purpose of retirement. First, the holder of an inherited IRA may never invest additional money in the account. . .  
"Second, holders of inherited IRAs are required to with­ draw money from such accounts, no matter how many years they may be from retirement. . .  
"Finally, the holder of an inherited IRA may withdraw the entire balance of the account at any time—and for any purpose—without penalty. . . "
IRAs that are owned by the participant continue to be protected to the extent provided by Federal or state law. (Both must be considered under the Bankruptcy Code.) In Michigan, that law is MCL 600.5451-1-k. Qualified retirement plans, including 401-k plans, are exempted under MCL 600.5451-1-l and under provisions of Federal law.