Debtor’s Estate Set to Expand or Contract
Based on Supreme Court Ruling in Clark v. Rameker1
By Marc P. Solomon and Hanna Lahr
Before the Supreme Court this term is the question of whether a beneficiary individual
retirement account (an “Inherited IRA”) is exempt from a debtor’s bankruptcy estate under 11
U.S.C. § 522(b)(3)(C) and (d)(12) 2 of the Bankruptcy Code. The issue turns on 1) whether the
funds in an Inherited IRA are “retirement funds,” and 2) whether an Inherited IRA is considered
tax exempt under the Internal Revenue Code (the “Tax Code”).
RELEVANT LAW
The primary provision at issue in Clark v. Rameker, pending before the Supreme Court, is §
522(b)(3)(C), which provides for the following exemption of property from a debtor’s estate:
“retirement funds 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.” The relevant provision under the Tax Code is § 408(e), which provides that “[a]ny
individual retirement account is exempt from taxation under this subtitle.”
FACTS OF CLARK
In October 2010, the debtors, Heidi Heffron-Clark and her husband Brandon Clark, filed for
bankruptcy protection under chapter 7 of the Bankruptcy Code in the United States Bankruptcy
Court for the Western District of Wisconsin. Nine years prior to the bankruptcy filing, Heidi
inherited her mother’s individual retirement account (“IRA”). She then established an Inherited
IRA and transferred the funds from her mother’s IRA into the Inherited IRA. In January 2002,
one month after establishing the Inherited IRA, Heidi and her husband began receiving monthly
distributions from the account.3 During this time, Heidi and her husband were not retired.
When Heidi and her husband filed for bankruptcy, the value of the Inherited IRA was $293,338.
1 (In re Clark), ___ U.S. ___ (2014).
2 These two provisions are identical, and which section applies depends on whether state law exemptions
(§ 522(d)(12)) or federal law e xemptions (§ 522(b)(3)(C)) apply to the debtor.
3 Distributions of an Inherited IRA must begin within one year of the original owner’s death. See Tax Code
§ 401(a)(9)(B).
