Many people don’t realize that a debtor in bankruptcy can usually keep the money that is in their retirement accounts. This is because in 2005, Congress amended the bankruptcy code and added 11 USC 522(d)(12), which allows debtors to exempt “[r]etirement funds to the extent that those funds are in a fund or account that is exempt from taxation under 401, 403, 408. . . .”

But what is the rule if some of the money a debtor has in retirement accounts comes from an inherited IRA?

The US Supreme Court recently decided to hear arguments in the bankruptcy case of Clark v. Rameker.

In this case, a debtor in bankruptcy received an IRA account from a deceased parent. Upon the death of the debtor’s parent, the IRA account was transferred under applicable tax rules to the debtor. Debtor declared bankruptcy and sought to exempt the funds in that Inherited IRA from the estate.

The Supreme Court decision will hopefully settle the question of “[w]hether an individual retirement account that a debtor has inherited is exempt from the debtor’s bankruptcy estate under Section 522 of the Bankruptcy Code, 11 U.S.C. 522, which exempts “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation” under certain provisions of the Internal Revenue Code.”

Various courts across the nation have addressed this question, including in the Sixth Circuit and Eastern District of Michigan (In re Kalso and In re Stephenson). And with few exceptions, courts nation-wide have ruled that the debtor is able to exempt the inherited IRA accounts.

Because I once participated in a similar case, I’ll be looking forward to following this case.