July, 2014 www.astlelaw.com
Kansas Bankruptcy News
A monthly publication for the non-bankruptcy attorney prepared by the Law Office of
Donald C. Astle, Donald C. Astle Attorney at Law.
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Clark v. Rameker, 573 U.S.__________ (2014)

On June 12, 2014, a unanimous opinion written by Justice Sotomayor, the United States Supreme Court held that inherited IRA accounts are not exempt. This does not affect the exemption of regular IRA accounts funded by the debtor. Only inherited accounts.
When an individual debtor files a bankruptcy petition the debtor’s legal or equitable interests in property become property of the bankruptcy estate. However, the Bankruptcy Code allows debtors to exempt from the estate certain property. One such exemption includes certain retirement funds, such as IRA’s. 11U.S.C. 522(b)(3)(c) and K.S.A. 60-2308 (see “Statute of the Month”). The U.S. Supreme Court consider the federal exemption 11U.S.C. 522(b)(3)(c). Typical Kansas debtors will use the Kansas exemption, KSA 60-2308. The Supreme Court’s holding applies to the federal exemption. So, the Kansas exemption remains intact. But, the Supreme Court’s holding could nullify many of the arguments that the Kansas IRA exemption would also apply to allow inherited IRA’s exempt.
In Clark v. Rameker the debtor’s mother established a traditional IRA and named her daughter as beneficiary of the account. When the mother died the IRA passed to the debtor and became an inherited IRA. The debtor exempted it under the federal exemptions, 11U.S.C. 522(b)(3)(c). The bankruptcy trustee objected to the claimed exemption on the basis that the inherited IRA funds were not retirement funds within the meaning of the statute. The Clark court analyzed three characteristics of inherited IRAs in its conclusion that they are not exempt.
First, the holder of an inherited IRA may never invest additional money in the account and is thus unlike traditional and Roth IRAs. Second, the holder of an inherited IRA is required to withdraw the money no matter how many years they may be from retirement. The holder must either withdraw all the funds within five years after the year of the original owner’s death or take minimal annual distributions every year. Third, the holder of an inherited IRA may withdraw the entire balance at any time, for any reason, and without penalty. Whereas with a traditional or Roth IRA withdrawal generally triggers a penalty if withdrawn prior to the age of 59½.
The Court went on to point out the fundamental purpose of an IRA. This purpose being helping to ensure debtors will be able to meet their basic needs during retirement. The traditional and Roth IRA holders must wait until age 59½ for penalty free withdraw. Typically IRA distributions are set up for periodic distribution over a period of years to supplement social security and other pensions.
The Court went on to say that the same cannot be said of an inherited IRA. Nothing would prevent a debtor from cashing the IRA upon receipt and using the entire IRA to buy a vacation home or sports car immediately after the bankruptcy was over.
The Bankruptcy Code is a balance between creditors’ interests in recovering assets and the debtors’ interests in protecting assets for a fresh start and sound financial future. Under the federal exemptions an inherited IRA is not exempt and trustee can liquidate it for distribution to creditors.
STATUTE OF THE MONTH
11USC522(b)(3)(c)
…an individual debtor may exempt property of the estate…to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.
KSA 60-2308(b) … any money or other assets payable to a participant or beneficiary from, or any interest of any participant or beneficiary in, a retirement plan which is qualified under sections 401(a), 403(a), 403(b), 408, 408A or 409 of the federal internal revenue code of 1986, and amendments thereto, shall be exempt from any and all claims of creditors of the beneficiary or participant.
JP...The Legal Cartoon
Copyright David Carter used with permission.
OUR TAKE ON THIS:
If an IRA is inherited it is not exempt under the federal exemptions and probably not exempt under state exemptions. So, treat it like any other non-exempt asset (like a boat). Liquidate the IRA and put it into something that’s exempt - like a car or homestead.
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Donald C. Astle
Washburn University, 1984