The Supreme Court finally addressed the issue of when an IRA does not count
as a retirement account. For nearly ten years, the question of whether
inherited IRAs are protected during
bankruptcy has gone unanswered. Finally, the Supreme Court has answered it with a
In Clark v. Rameker, Heidi Heffron-Clark filed for bankruptcy nine years
after inheriting her mother’s IRA. When the case hit the Supreme Court,
Justice Sonia Sotomayor wrote up the Court’s finding that the account could
not be protected from creditors during bankruptcy.
The opinion produced by the court asserts a legal difference between a
retirement account that you have accumulated yourself and those you have
inherited. The Court cites differences between the two accounts, such
as that inheritors cannot even add money to the IRA. In most cases, they
have to withdraw within five years of inheritance or withdraw at least
a certain amount every year. However, these requirements typically do
not apply to spousal IRA inheritance.
When you own your own IRA, it is set up specifically for retirement. You
can add money to it and you do not have to withdraw. It is there so you
can protect yourself when you are no longer able to work. According the
Supreme Court, the fact that an IRA is this sort of protection justifies
keeping it from creditors in the event of bankruptcy.
The funds in your IRA accounts and other retirement plans, such as 401(k)s
and 403(b)s are not generally part of a will. You have to fill out specific
forms either when opening the account or after the account is open in
order to name a beneficiary. In the case of Heidi Heffron-Clark, her mother
Ruth Heffron filled out those papers naming Heffron-Clark as the sole
beneficiary of a more than $450,000 IRA. Clark died just a year after
naming her daughter as the IRA beneficiary and Heffron-Clark filed nine
years later, in 2010.
The IRA account in question was worth about $300,000 when Heffron-Clark
filed for bankruptcy. She had withdrawn about $150,000 already. At that
time, she asserted that the remaining funds were for her retirement and
therefore should be protected. Her creditors disagreed and the court said
that the funds should not be protected. She appealed at the U.S. District
Court for the Western District of Wisconsin and had the decision reversed.
The 7th Circuit Court of Appeals overturned that decision.
In light of Heffron-Clark’s alleged financial struggles, it seems odd
that she would go through this much litigation. It would reasonably run
up a very large bill. Nonetheless, IRA inheritors now have concrete answers
to help them develop financial strategies for the future based on the
Supreme Court’s ruling.
The case is different for spouses who inherit an IRA. They have one way
to protect their funds that other inheritors do not. They can roll over
the funds in their deceased spouse’s IRA into one of their own and
delay distribution of a traditional IRA until the age of 70½. Unfortunately,
spouses still have to pay any early-withdrawal penalties if the money
is withdrawn before the living spouse’s IRA before he or she turns
Even with the risk of an early-withdrawal penalty, the strategy may be
worth it. Without rolling over the funds, the IRA is considered inherited.
Spousal IRA inheritors can keep the account without withdrawing anything
until his or her spouse would have been 70½. The problem is that,
if there is a bankruptcy, the money is not protected from creditors. If
there is a risk of that happening, a rollover is the best way to protect
that retirement money.
According to Gideon Rothschild of New York’s Moses & Singer, all
individuals can protect their heirs by naming a trust as the beneficiary
as the IRA instead of a single individual. This protects any heir, be
they are spouse, child or other. A lot of people turn to this method to
protect the money they leave to their heirs. However, it is advisable
to speak to financial experts about this before implementing the plan.
There are a lot of legalities that the typical layman may find difficult
The Supreme Court’s decision does not affect your personal IRAs. You
still have the protection of the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005 .