Supreme Court Grants Certiorari Over Inherited IRA Issue

As I have previously discussed, the Seventh Circuit Court of Appeals held that funds within an IRA are not necessarily retirement funds so the funds could not be shielded from creditors. Now, the Supreme Court has agreed to decide whether an inherited IRA is classified as a “retirement fund” and thus not subject to claims from creditors.

The IRS rule is that distributions of an inherited IRA to an individual beneficiary who is not a spouse must generally commence post-death required minimum distributions starting one year after the death of the IRA owner and is payable under a life expectancy rule.

In the case at issue, Heidi Heffron-Clark was the beneficiary to an IRA worth $300,000. During the distribution, Heffron-Clark declared bankruptcy. Typically IRAs are shielded from creditor claims, however, the trial court judge found that the IRA was not exempt because the funds were not supposed to be held for Heffron-Clark’s retirement.

A federal judge reversed the ruling because he believed the funds should be treated as if they were the funds of the original owner. Since then, the 7th Circuit held that “by the time the Clarks filed for bankruptcy, the money in the inherited IRA did not represent anyone’s retirement funds.” The 7th circuit decision disagreed with the 5th circuit and agreed with the bankruptcy court. 

See Barbara Leonard, Question Over Inherited IRAs Goes to Washington, Nov. 27, 2013.

Special thanks to Brian Cohan (Attorney at Law, Law Offices of Brian J. Cohan, P.C.) for bringing this article to my attention.