Inherited IRAs - No Bankruptcy Exemption

Under current bankruptcy rules, “retirement funds” are exempt property in bankruptcy, and cannot be reached by a debtor’s creditors.

In a recent case, In Re: Clark, an appellate court held that the federal exemption for retirement funds does not apply to inherited IRAs.

Inherited IRAs are retirement funds of a decedent that are inherited by a decedent’s beneficiary.

The court’s reasoning was that by the time the debtor (in this case a daughter) filed for bankruptcy, the money in the inherited IRA did not represent anyone’s retirement funds, and to treat this account as exempt would be to shelter from creditors a pot of money that can be freely used for current consumption by a debtor.

The rules involving inherited IRAs are continuing to change in several areas. If you have any questions regarding the tax treatment of an inherited IRA please contact us.