U.S. Supreme Court To Consider Whether Inherited IRA is Creditor Protected

In April 2010 we reported on the cases, In re Chilton, No. 08-43414 (Bankr. E. D. Tax. Mar. 5, 2010) and In re Nessa, No. BKY 09-60081 (Bankr. D. Minn. Jan 11, 2010). The Chilton court found that while an IRA is given creditor protection, that protection does not extend to an inherited IRA.  The Nessa court found the opposite.

In a recent case arising from the Seventh Circuit of the Court of Appeals, (the Circuit in which Illinois is located), Clark v. Rameker, U.S. No. 13-299, cert. granted 11/26/2013, the U.S. Supreme Court as agreed to hear the Clark case, and perhaps to resolve the conflict among the Districts.  The underlying facts of Clark turn on a woman who inherits a $300,000 IRA.  Shortly afterward she and her husband declared bankruptcy.  The Seventh Circuit Court of Appeals found that the inherited IRA does not warrant the same protection as an IRA or 401(k) since no new contributions may be made to it and the inherited IRA cannot be merged with any other account.  Further, the assets in an inherited IRA must begin to be distributed to the beneficiary over the beneficiary’s life expectancy and in some cases, as soon as within 5 years.  Accordingly, an inherited IRA should not be considered “retirement assets” and given the same protection in bankruptcy court as IRAs and 401(k) plans.