The United States Supreme Court Case of Clark v. Rameker is an IRA Planning Game Changer
By: Morris Law Group - August 07, 2014
In Clark v. Rameker, the U.S. Supreme Court unanimously held that assets held in inherited IRAs are not protected from the claims of creditors in the event the owner declares bankruptcy.
In Clark, Heidi Heffron-Clark inherited an IRA from her deceased mother. Years later, Heidi and her husband filed for Chapter 7 bankruptcy protection. The Clark's excluded Heidi's inherited IRA (valued at around $300,000) from her bankrupt estate, taking the position that the IRA is a retirement account and is an exempt asset under the bankruptcy code. The trustee of the bankruptcy estate and a creditor objected to the exclusion. The Supreme Court held that under the bankruptcy code, inherited IRAs will now not be exempted from a bankrupt's estate; thus, inherited IRAs are subject to creditors.
The Court indicated that special features of inherited IRAs distinguish them from traditional retirement accounts. First, the holder of an inherited IRA may never invest additional money in the account. Second, holders of inherited IRAs are required to withdraw money from the accounts, no matter how far they are from retirement. Finally, the holder of an inherited IRA may withdraw the entire balance of the account at any time-and use it for any purpose-without penalty. These differences led the Court to conclude that inherited IRAs are not true retirement funds that are entitled to protection from creditors.
For Florida residents who are debtors, the Clark case would have no direct impact, because such debtors would not avail themselves of the bankruptcy code to exempt assets from their bankrupt estate. Rather, because Florida opted out of using Federal exemptions, debtors would instead rely on the exemptions provided under Florida Law (Florida Statutes Chapter 222). Moreover, as it applies to inherited IRAs, Florida law was recently changed to make it clear that inherited IRAs are exempt, and have always been exempt under Florida law.
Likewise, a surviving spouse who rolls a deceased spouse's IRA into his or her own IRA would still be able to exempt such an IRA from bankruptcy creditors under the bankruptcy code. The surviving spouse needs to make sure they do not elect to treat the IRA as an inherited IRA whereby they would not be able to exempt such an IRA under the bankruptcy code.
For estate planning purposes, Florida planners and their clients still need to address planning to protect the client's IRAs. While Florida's exemptions apply to Florida residents who are debtors, the beneficiaries of an IRA may not be from a state like Florida which opts out of the federal exemptions and protects inherited IRAs. Thus, planners should consider other ways to protect the IRA, such as leaving the IRAs in trust that qualify as designated beneficiaries.
Please contact us to review your IRA accounts, your beneficiary designations, your estate plan and to discuss this recent legal development and how it may affect your IRA accounts.