Clark v. Rameker – Supreme Court Rules that Inherited IRAs are Not Protected from Creditors

Last week the United States Supreme Court issued the long awaited decision in the case of Clark v. Rameker.  The decision resolved a conflict among the lower courts as to whether or not an inherited retirement account was exempt from creditor claims in Bankruptcy.  Generally, your own retirement account (Traditional IRA, Roth IRA, 401K, 403B and the like) is exempt from the claims of creditors, meaning it cannot be seized by judgment creditors or lost in a bankruptcy.  However, it has been unclear whether this same protection is available to retirement accounts you inherit from another.The relevant facts of the Clark case are as follows:  In 2000, Ruth Heffron established an IRA and named her daughter, Heidi Heffron-Clark, as the sole beneficiary.  Ms. Heffron died in 2001 and her IRA passed to her daughter.  Clark elected to take monthly distributions from the account. Subsequently, in October 2010, she and her husband, filed for bankruptcy.  At the time they filed their bankruptcy petition, the inherited IRA was worth approximately $300,000.  They claimed that the inherited IRA was exempt from the bankruptcy estate.  The bankruptcy trustee and unsecured creditors objected, arguing that the monies in the inherited IRA were not retirement funds and thus should be available to satisfy creditors.In a unanimous decision, the Supreme Court found in favor of the bankruptcy trustee and unsecured creditors.  The decision was based upon three points:

  • The holder of an inherited IRA may never invest additional money in the account.
  • Holders of inherited IRAs are required to withdraw money from the accounts, no matter how far they are from retirement.
  • The holder of an inherited IRA may withdraw the entire balance of the account at anytime—and use it for any purpose—without penalty.

This decision makes clear what we have been advising our Clients for some time, if providing asset protection to your beneficiaries is important, the Retirement Plan Legacy Trust™ is an important tool for you.The Retirement Plan Legacy Trust™ is a stand-alone trust drafted specifically to comply with the complex rules regarding qualified plans and IRAs.   In addition to the asset protection that was not available to the Clarks, establishing a Retirement Plan Legacy Trust™ and naming it as the beneficiary of an IRA or qualified plan can provide a number of benefits. These include:

  • Protecting the individual trust beneficiary from his or her temptation to waste "found money."  The Trustee you name is in control of how quickly monies can be disbursed from the Trust.
  • Predator protection - Even if the individual beneficiary does not have spendthrift tendencies, there are many out there whose interest lies in separating the beneficiary from their money and property.
  • Divorce protection - With the national divorce rate above 50%, it is impossible to determine which marriages will stand the test of time. A Retirement Plan Legacy Trust™ keeps the inherited IRA from being divided or even lost in a divorce.

If you have a retirement account and are concerned about the effects of the Clark decision on your plan, please give us a call.