Do Creditors Now Have Carte Blanche Access to Your Inherited IRA To Satisfy Debts?

Many of us are aware that assets held in individual retirement accounts (IRA’s) and similar retirement assets are provided a certain amount of protection from creditors. However, on June 12, 2014 the Supreme Court of the United States issued a unanimous decision in Clarke v Rameker, Trustee, 573 U.S. ___ (2014), that assets in an inherited IRA are not protected from bankruptcy creditors. This decision is potentially devastating to the millions of Americans that have and will be inheriting the trillions of dollars saved by the Baby Boomers over the past decades. While it is clear that creditors in bankruptcy proceedings will now have access to assets that many believed were protected, the extent to which this ruling will enable creditors outside of bankruptcy proceedings to collect on debts and judgments by invading the assets held in an inherited IRA remains unclear. 

Heidi Heffron-Clark inherited an IRA in 2001 from her mother and chose to leave the money in the inherited IRA, taking minimum required distributions annually to enable the money to continue growing tax deferred (assumedly for the purpose of providing for her and her husband’s future retirement). However, in 2010, Heidi and her husband filed for Chapter 7 bankruptcy.  Heidi attempted to exclude the $300,000 remaining in her inherited IRA from her bankruptcy estate which would be used to pay the various creditors. Heidi was relying upon an exemption found in the Bankruptcy Code, 11 U.S.C. § 522(b)(3)(C). That exemption provides that “retirement funds” held in IRA’s and various other retirement assets are to be excluded from a debtor’s bankruptcy estate, to ensure that a debtor has some means of surviving and rebuilding his or her life.

Not surprisingly, the creditors and the bankruptcy trustee objected to the exclusion of such a large sum of money and sought to collect the debts owed from the inherited IRA. The Supreme Court’s decision in favor of creditors places millions of dollars at risk of being used to satisfy creditors’ claims. This has essentially removed the benefit of using beneficiary designation planning for inherited IRA’s as a simple and easy means of planning for the distribution of assets after death while providing the highly valuable protection from creditors that is often found in trusts.

Hopefully Michigan’s bankruptcy exemption statute and its judgment debtor’s exempt assets statute found at MCL 600.5451 and MCL 600.6023, will continue to provide the protection to inherited IRA’s that the Supreme Court has partially removed. Michigan’s laws do not contain the same limiting language as the federal Bankruptcy Code which the Supreme Court focused on and appear to protect all retirement accounts, even inherited IRA’s. However, it is likely that this decision will lead creditors both inside and outside of bankruptcy proceedings to attempt to levy against inherited IRA’s to satisfy debts owed, in efforts to capitalize on the Supreme Court’s recent opinion.

As a result, Michigan residents who own inherited IRAs, or own a regular traditional or Roth IRA, which they hope to pass to their heirs should take great care and caution in planning for the protection of such valuable assets. Because, while much remains unclear as to the extent non-bankruptcy creditors can levy against inherited IRA’s, it is clear that the courts are not as likely to view inherited IRA’s with the same deference as other retirement assets.

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