Clark v Rameker decision by Supreme Court

Today, the Supreme Court held in favor of a trustee who argued that a debtor cannot exempt a tax-exempt inherited individual retirement account under a section of the bankruptcy code that allows debtors to exempt “Retirement funds to the extent that those funds are in a fund or account that is exempt from taxation. . . .”

The Supreme Court held that funds held in inherited IRAs are not “retirement funds” within the meaning of §522(b)(3)(C).

To decide this, they turned to the American Heritage Dictionary to define “funds.” Then, they turned to the dictionary to define “retirement.” Cleaving the two definitions together, the Court wrote that “Section 522(b)(3)(C)’s reference to ‘retirement funds’ is therefore properly understood to mean sums of money set aside for the day an individual stops working.”

The Court then offered guidance for future cases where this question might arise by stating, “we look to the legal characteristics of the account in which the funds are held, asking whether, as an objective matter, the account is one set aside for the day when an individual stops working.”

The Court then explained several key differences between an inherited IRA and a Roth IRA or traditional IRA. First, with an inherited IRA, an account holder cannot contribute to the account. Second, they must take mandatory distributions. Finally, unlike other retirement accounts, an individual can withdraw the entire balance of the account at any time without penalty.

Taken together, the Court was unwilling to let the debtor keep a “pot of money” and thwart the purpose of bankruptcy. They wrote, “Allowing that kind of exemption would convert the Bankruptcy Code’s purposes of preserving debtors’ ability to meet their basic needs and ensuring that they have a ‘fresh start’ into a ‘free pass.’”

Note: I wrote about this case in an earlier blog post.