CLARK v. RAMEKER
In 2001, Heidi Heffron-Clark inherited a $300,000 individual retirement account (“IRA”) from her mother’s estate. The U.S. tax code provides special rules for IRAs that are inherited by someone other than the spouse of the deceased. These rules prohibit additional contributions to the inherited account and require the beneficiary to withdraw, and pay taxes on, a minimum amount from the account each year. Heidi and her husband (the “Clarks”), filed for bankruptcy in 2010 and claimed the inherited IRA was exempt from creditor claims. A bankruptcy judge ruled that retirement funds must be held for the current owner’s retirement in order to qualify as an exempt retirement fund under Section 522 of the U.S. Bankruptcy Code. Because the Clarks were required to withdraw money from the inherited IRA before their retirement, the judge held that the account was subject to creditor claims in the bankruptcy proceeding. The federal district court reversed and held that Heidi’s inheritance of the IRA did not change its status as a protected retirement fund. The U.S. Court of Appeals for the Seventh Circuit reversed.
Does the U.S. Bankruptcy Code exempt an inherited IRA from a debtor’s estate in bankruptcy?
Legal provision: Bankruptcy Act
No. Justice Sonia Sotomayor delivered the opinion for the unanimous Court. The Court held that an inherited IRA account did not qualify as a retirement fund for the purposes of exemption under the U.S. Bankruptcy Code. Since the Bankruptcy Code does not explicitly define the term “retirement fund,” the Court held that it should retain its ordinary meaning—a fund that is set aside for an individual’s retirement. Inherited IRAs do not fit this definition because the individual cannot invest more money in the account and is required to draw money from the account regardless of how far the individual is from retirement. The Court held that allowing an inherited IRA to be exempt from creditor claims would undermine the purpose of the Bankruptcy Code.
Chief Justice John G. Roberts: Justice Sotomayor has our opinion this morning in case 13-299, Clark v. Rameker.
Justice Sonia Sotomayor: Petitioners are a married couple who filed for bankruptcy 2010.
During their bankruptcy proceedings, petitioners sought to claim an exemption for $300,000 held in an inherited IRA which the wife had inherited from her mother.
Petitioners argued that the funds were exempt under §522(b)(3)(C) of the Bankruptcy Code which covers retirement funds to the extent those funds are in an account that is exempt from taxation under various sections of the Tax Code.
The question presented is whether the funds in inherited IRAs are retirement funds within the meaning of this provision.
The Seventh Circuit held that they are not in conflict with the Fifth Circuit.
We think the Seventh Circuit got it right and we therefore affirm.
The ordinary meaning of retirement funds is “sums of money set aside for the day an individual stops working”.
To determine whether a pot of money meets this definition, we look at the objective legal characteristics of the account in which the money is held.
Applying that test, these characteristics lead us to whole 01:28 but inherited IRAs do not contain retirement funds.
First, the owner of an inherited IRA can never contribute money to the account.
Second, an owner must withdraw her money from her inherited IRA no matter how far away she may be from her retirement years.
Third, an individual can withdraw the entire amount of money from her inherited IRA at anytime and use it for any purpose without paying a penalty.
Funds in an inherited IRA can thus be used freely for current consumption and are not set aside for the day that person stops working.
Petitioner's main argument is that the funds in an inherited IRA are exempt because they use to be held in a retirement account at an earlier point in time.
But the ordinary understanding of retirement funds encompasses funds currently set aside for retirement not funds that used to be set aside for retirement by a different person at a different point in time.
Petitioner's interpretation would also render the statute's use of the term “retirement funds” superfluous.
A reading we are reluctant to accept and although petitioners are correct that the interpretation we adopt has the limited effect of carving out just inherited IRAs from the retirement funds exemption.
We think a reading that treats the term retirement funds as meaningful but modest is more faithful to the statute.
The judgment of the United States Court of Appeals for the Seventh Circuit is accordingly affirmed.
This opinion is for unanimous court.