The U.S. Supreme Court will hear a case that could dictate how inherited IRAs are treated in bankruptcy.
In a decision that could affect retirement and estate planning, the Court will hear arguments in Clark v. Rameker, a case involving the bankruptcy of a small-town pizza shop owner. The Court will decide whether the shop owners, Heidi Heffron-Clark and her husband, Brandon Clark, can keep creditors from going after $300,000 in an IRA inherited from Heffron-Clark's late mother.
The Clarks declared bankruptcy in 2010 after they closed their pizza shop in Soughton, WI. William Rameker, the trustee in charge of administering the couple's bankruptcy estate, took the position that the IRA was fair game for creditors, while the Clarks argued it was exempt under bankruptcy laws, which generally protect retirement funds.
After an initial victory for Rameker was reversed by a district court, the 7th U.S. Circuit Court of Appeals sided with Rameker, saying that creditors could access the inherited IRA. While bankruptcy laws exempt retirement funds from creditor claims, the court said, IRAs cease to be "retirement funds" when inherited from a deceased owner. That ruling clashes with decisions in the 5th and 8th Circuits, where judges have held that IRAs do not cease to be retirement funds when they change hands.
A Supreme Court ruling in favor of Rameker could lead to more people leaving their IRAs to a trust, rather than directly to offspring. Initial court briefs in the case are due in January; arguments are expected sometime in March.
