The Supreme Court’s decision in Clark V. Rameker holding that inherited IRA funds are not exempt in bankruptcy could impact estate planning decisions.
In June 2014, the U.S. Supreme Court issued a decision in Clark V. Rameker, a case dealing with whether funds in an inherited IRA account qualified as “retirement funds” for the purposes of the bankruptcy code. The Court held that the funds were not protected from creditors in bankruptcy proceedings, and the Court’s decision could have an impact on people’s estate planning decisions.
Inherited IRAs not protected in bankruptcy
The case began in 2001, when a woman inherited an IRA account with $450,000 after her mother’s death. The woman and her husband elected to receive monthly distributions from the account, as the law requires of inherited IRAs. In October 2010, the couple filed for Chapter 7 bankruptcy. The couple listed the funds in the account, which by that time had decreased to $300,000 due to the monthly distributions, as assets exempt from the bankruptcy estate. They argued that the money was protected from creditors’ claims because it was in a retirement account, and the Bankruptcy Code exempts retirement funds from the bankruptcy estate.
The trustee in the case, however, argued that the funds were not exempt because they did not meet the definition of retirement funds for the purposes of the bankruptcy code. The bankruptcy court agreed with the trustee, reasoning that money in an inherited IRA is not set aside to meet the heirs’ retirement needs. The district court reversed the bankruptcy court, holding that the Bankruptcy Code exemption for retirement funds covered all money set aside for retirement. The appellate court reversed the district court, noting that money in an inherited IRA was intended for current consumption, not retirement savings, since the law requires people to take distributions from IRAs they inherit.
The Supreme Court agreed with the appellate court, holding that money in an inherited IRA does not meet the definition of retirement funds under the Bankruptcy Code because the heir of the account cannot make additional investments to the account for future use in retirement. The heir can only draw on the account.
Protecting retirement funds in estate plans
Many experts note that people may want to review their estate plans in light of the Supreme Court’s decision to ensure that their retirement accounts are protected for their beneficiaries. Estate planning experts have suggested that rather than naming a person as a beneficiary of a retirement account, it may be wiser to set up a trust and make the trust the beneficiary. People may choose to set up Standalone Retirement Trusts or “see-through” trusts. When properly drafted, these trusts can help protect the funds from beneficiaries’ creditors and can even prevent the beneficiaries from spending the money unwisely by putting parameters on the dispensation of trust funds.
Speak with an attorney
Drafting a trust can be complicated, and it is important to have the assistance of a skilled estate planning attorney when setting up a trust. If you have questions about the best way to protect your retirement assets with a trust, speak with an experienced estate planning attorney who can help ensure that your trust is properly established and protects your assets.