(Reuters) - The U.S.
Supreme Court on Thursday said inherited individual retirement accounts are not
protected from creditors in bankruptcy, in a ruling that impacts one of the
most popular ways to save for retirement.
a unanimous opinion, the nation's highest court held that IRAs inherited by
someone other than a spouse cannot be considered retirement funds, because
beneficiaries cannot invest additional money or delay distributions until
of inherited IRAs in bankruptcy is gaining relevance as Baby Boomers die and
leave assets to their children.
A set of 2005
bankruptcy law amendments protect retirement accounts from the reach of
creditors. The Supreme Court was asked to decide if Congress intended those
protections to extend to inherited IRAs in Clark v. Rameker, a dispute over the
bankruptcy of a small-town pizza shop owner in Soughton, Wisc.
Heffron-Clark and her husband, Brandon Clark, declared bankruptcy in
2010 after the shop closed. The Clarks' main asset was about $300,000 in
an IRA inherited from Heffron-Clark's mother. William Rameker, the trustee
administering the Clarks' estate, wanted to get his hands on the money for the
benefit of landlords and other creditors owed about $700,000.
conflicting rulings through multiple appeals, the Supreme Court heard arguments
in March in an effort to clear up inconsistencies on the issue in different
In an opinion
penned by Justice Sonia Sotomayor, the high court said the bankruptcy code is
designed to strike a balance between ensuring creditor recoveries while
protecting a debtor's "essential needs."
determined an inherited IRA did not fall within the scope of an essential need
the way retirement security did.
"Nothing about the inherited
IRA’s legal characteristics would prevent (or even discourage) the individual
from using the entire balance of the account on a vacation home or sports car
immediately after her bankruptcy proceedings are complete," the ruling
A lawyer for
the Clarks declined to comment. Attorneys for Rameker did not respond to a
request for comment.
a director at tax and consulting firm McGladrey, said the ruling creates a
disincentive for people to save money using IRAs.
has written on the case and believes inherited IRAs should be protected, said
she believes state legislatures will be "inundated" with bills
seeking to protect inherited IRAs, a step seven states have already taken.
meantime, she said, people should put retirement money in trusts. "We need
to quickly get the word out to IRA owners to designate spendthrift trusts as
the beneficiaries of their retirement plans," she said.
arguments in March, Justice Elena Kagan stressed the importance of the outcome,
saying "tons and tons of people have IRAs, and they die every day."
affirms a decision last year authored by Frank Easterbrook, the economic
scholar and chief judge for the 7th U.S. Circuit Court of Appeals.
Easterbrook's ruling was at the time contrary to prevailing case law in other
for the original article from Reuters.