The Supreme Court Grants Certiorari to Determine if a Non-Spousal Inherited IRA Is Exempt from a Bankruptcy Estate

• In Event: Tax Policy and Research

Abstract

Bankruptcy Code §§ 522(b)(3)(C) and (d)(12) exempts from the bankruptcy estate “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation” under certain provisions of the Internal Revenue Code. The Supreme Court granted certiorari in Clark v. Rameker, 714 F.3d 559 (CA-7, 2013), cert. granted, 134 S.Ct. 678 (2013) to resolve a split among the circuit courts over the issue of whether a non-spousal inherited IRA of a debtor is exempt from the debtor’s bankruptcy estate under Bankruptcy Code § 522(b)(3)(C) and (d)(12). In Clark, the Seventh Circuit ruled that it is not exempt as it does not represent retirement funds in the hands of the debtor or anyone’s retirement funds. It reasoned that inherited IRAs represent an opportunity for current consumption rather than a fund for retirement savings, and “the account remains a tax-deferral vehicle until the mandatory distribution is completed, but distribution precedes the owner’s retirement.”
Conversely, in Chilton v. Moser, 674 F.3d 486 (CA-5, 2012), the Fifth Circuit held that the non-spousal inherited IRA qualified for exemption pursuant to Code § 408(e)(1), which is enumerated in Bankruptcy Code §522(d)(12). The court opined that the funds in an inherited IRA are retirement funds based on the plain meaning of the statute and that Code § 408(e)(1) exempts from taxation any individual retirement account, including traditional and inherited retirement accounts. The court interpreted retirement funds to include both funds that others besides the debtor originally set aside for their retirement and those set aside by the debtor. The court reasoned that Bankruptcy Code § 522(b)(4)(C) provides that a direct transfer of retirement funds from a fund or account that is exempt from tax under Code § 408 does not cease to qualify the funds for exemption under Bankruptcy Code § 522(d)(12), thus the direct transfer of funds from the decedent's traditional IRA into the inherited IRA does not alter their status as retirement funds.
The issue to be resolved is of extreme importance, as it will have a major impact on the bankruptcy system, economy of the United States, and retirement planning of millions of Americans. Its importance is attested to by the granting of certiorari, as a very small percentage of petitions for certiorari are granted by the Supreme Court.

Author

• Mark Aquilio, St John's University