Inherited IRAs and Chapter 7

INHERITED IRA’S TARGETED BY CHAPTER 7 TRUSTEES AND POSSIBLY A GREATER NEED FOR CHAPTER 13

            With the coming wave of Baby Boomer inheritance issues, one situation has suddenly taken on new urgency. Most people who are near retirement age or have already retired were gradually shifted from traditional pension plans into an IRA or 401(k) plan in the past. IRAs and 401(k) funds are two of the most common exemptions that are claimed in Chapter 7 or Chapter 13 cases. This means that the IRAs and 401(k) plans cannot be liquidated in a Chapter 7 filing or counted as liquidation in a Chapter 13 case. The accounts simply pass through the filing of a bankruptcy and will remain available for later income upon retirement.

            Recently, however, a new issue has become a target for Chapter 7 Trustees. What if a Chapter 7 debtor had inherited an exempt IRA and then rolled the funds into an exempt IRA in their own name within the allowed period after inheritance? This is precisely the issue confronting the Supreme Court now. The case is Clark et ux. V. Rameker et al., U.S. Supreme Court, No. 13-299.

            In the Clark case, the Wife inherited a $300,000.00 IRA from her later mother. She immediately rolled that amount into an exempt IRA in her own name. When their pizza business failed, the Clarks filed for Chapter 7 to discharge approximately $700,000.00 in business guarantee and personal debts. They claimed the IRA as exempt in the Chapter 7 filing.

            Prior to that date, the 5th and 8th Circuits had ruled such inherited funds to be exempt. Undeterred, the Chapter 7 Trustee filed an exemption to the IRA in the Clark’s Chapter 7 case. Eventually, the 7th Circuit ended up with the case and ruled that the IRA was not exempt since the funds were inherited and not for the savings or retirement of the Clarks.

            The Supreme Court will most likely rule on the issue in June of 2014. Our office is closely monitoring the case and progress of the current exemption in inherited IRAs. Don’t be surprised if inherited 401(k)s are the next target as they are essentially the same as an IRA for exemption purposes.

            At Mickler & Mickler, we attend Court on a regular basis. We have the experience and knowledge to ensure that you receive the correct advice when confronted with difficult financial decisions related to filing bankruptcy. Contact us at 904.725.0822 or bkmickler@planlaw.com.

 

Bryan K. Mickler