Trust Updates Archive
(June 13, 2014 --Chicago, IL) -- Funds in an inherited IRA are not considered "retirement funds" for purposes of bankruptcy exemption, the U.S. Supreme Court unanimously ruled yesterday.
The ruling settles a split among federal appeals courts and allows the growing number of aging baby-boomers to better plan how they will pass on unspent IRA funds.
"Although petitioners’ counterarguments are not without force, they do not overcome the [federal bankruptcy] statutes’ text and purpose , " wrote Justice Sonia Sotomayer for the court.
During oral arguments, earlier this year, several justices were concerned that granting inherited IRAs the same creditor protection that IRAs have, when in the hands of the original owner, would be creating a "special class" of retirement account. Prior to the high court’s ruling yesterday, only the Seventh Circuit Court of Appeals came to a similar conclusion.
Possibly compounding yesterday’s ruling are laws in seven state that specifically protect inherited IRA accounts from creditors.
Petitioners, a husband and wife, filed for Chapter 7 bankruptcy, and identified as exempt from their bankruptcy estate an inherited individual retirement account (IRA) of roughly $300,000, under the "retirement funds" exemption. This exemption permits a debtor to exempt retirement funds when those funds are in an account that is exempt from taxation under the Internal Revenue Code.
The bankruptcy court denied the exemption, concluding that an inherited IRA is not the same as a traditional IRA. A federal district court reversed, reasoning that the bankruptcy exemption includes any account in which funds were gathered for retirement purposes. The Seventh Circuit reversed the District Court.
For more on this topic, see Trust Regulatory News. For a copy of the U.S. Supreme Court ruling Click Here.
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