U.S. Supreme Court Unanimously Holds That IRAs Are Subject To The Reach of Creditors in Bankruptcy.

In this case, the debtor's mother established a traditional IRA and named her daughter (the debtor) as the sole beneficiary. About a year later, the mother died and the IRA account containing approximately $450,000 passed to the daughter as an inherited IRA which the daughter rolled into her own IRA. The daughter elected to take monthly distributions from the account before retiring. Approximately nine years later, the daughter (and her husband) filed Chapter 7 bankruptcy and claimed the IRA account (with a balance of approximately $300,000 at the time) as an exempt asset by virtue of 11 U.S.C. Sec. 522(b)(3)(C).   The bankruptcy court (450 B.R. 858 (Bankr. W.D. Wis. 2011)) ruled that the IRA account was not exempt on the basis that inherited IRA funds are not "retirement funds" in the hands of the debtor and, therefore, are not exempt; on review, the district court (466 B.R. 135 (W.D. Wis. 2012)) determined that IRA account funds need not be “retirement” funds of the debtor to qualify for the exemption; the district court followed themajority view that direct transfers of retirement funds from a tax-exempt account qualify for exemption, and that it was immaterial that there are differences between traditional IRAs and inherited IRAs due to I.R.C. §408(e)(1).  The court noted that the question of whether an inherited IRA should be exempt was up to the Congress to change the statute.  On further review (In re Clark, 714 F.3d 559 (7th Cir. 2013)), the circuit court reversed on the basis that inherited IRAs represent an opportunity for current consumption in the hands of the debtor and are not a fund of retirement savings.  The court analogized the situation to that of the debtor inheriting a home - the home is only exempt if the debtor lived in it, and is not exempt merely based on how the prior owner used the property. The appellate court's opinion is contrary to Fifth Circuit in In re Chilton, 674 F.3d 486 (5th Cir. 2012). The U.S. Supreme Court granted certiorari to clear-up the split among the circuit courts on the issue.  On further review, the U.S. Supreme Court affirmed. The court reasoned that inherited IRAs are not "retirement funds" within the meaning of 11 U.S.C. Sec. 522(b)(3)(C), because the holder of the inherited IRA may never invest additional funds, the holder must withdraw funds irrespective of how many years remain until retirement, and the holder can withdraw the entire account balance on demand at any time without penalty. Clark v. Rameker, No. 13-299, 2014 U.S. LEXIS 4166 (U.S. Sup. Ct. Jun. 12, 2014).