This, in essence, is the question the U.S. Supreme Court very recently addressed in Clark v. RAMEKER, No. 13-299 (U.S. June 12, 2014).
I. Exempting Retirement Funds
I have discussed exemptions in many previous posts.
In one post I covered exempting non-ERISA-qualified retirement plans such as IRAs. I pointed out that in Rousey v. Jacoway, 544 U.S. 320 (2005) the Supreme Court held that IRAs were exemptible because they had characteristics that were similar to ERISA-qualified plans such as 401(k)s. I then stated that if a debtor had a non-ERISA-qualified retirement plan, then depending on the nature of the account, the debtor (i.e., the debtor’s counsel) could appeal to Rousey’s reasoning to argue by analogy that the accounts are ERISA-like and then appeal to Rousey’s holding to exempt them.
The above discussion applies nicely to retirement plans that debtors set up for themselves. But an inherited IRA is one that was set up by someone other than the debtor, for that person’s benefit, and not for the debtor’s benefit. The funds did not belong to the heir when they were contributed to the plan. In that situation the Supremes in Clark held that Rousey’s reasoning is inapposite.
In Clark the Supremes held that an inherited IRA could NOT be exempted using a retirement exemption. In its unanimous decision the Court held:
The text and purpose of the Bankruptcy Code make clear that funds held in inherited IRAs are not “retirement funds” within the meaning of §522(b)(3)(C)’s bankruptcy exemption.
Clark v. RAMEKER at section II. (The case is so recent that page numbers have not yet been included.)
Therefore, if you have an inherited IRA that cannot be exempted using something other than a retirement exemption, you need to hire an extremely knowledgeable and highly skilled bankruptcy attorney to determine whether bankruptcy even makes sense for you, and to discuss careful prebankruptcy planning if bankruptcy is necessary.