Court: Inherited IRAs not protected in bankruptcy

WASHINGTON (AP) — A unanimous Supreme Court ruled Thursday that inherited Individual Retirement Accounts are not shielded from creditors in bankruptcy proceedings, a decision that clears up confusion about the status of unspent IRAs that parents leave to their children.

Bankruptcy law typically protects retirement assets from the reach of creditors. But unlike a typical IRA, money in an account inherited from a parent can be withdrawn without waiting for the new owner to retire.

Writing for the court, Justice Sonia Sotomayor said that crucial change in the status of the account makes it less like retirement savings and more like a pot of money available to pay off creditors. Otherwise, Sotomayor said, nothing would prevent someone who declares bankruptcy from using the entire balance of an inherited IRA “on a vacation home or a sports car immediately after her bankruptcy proceedings are complete.”

The case involved a Wisconsin couple — Heidi Heffron-Clark and her husband, Brandon Clark — who declared bankruptcy but wanted to prevent creditors from going after the $300,000 IRA that Heffron-Clark inherited when her mother died.

Heffron-Clark argued that an inherited IRA is still technically a retirement fund because that’s the way it was originally set up. She failed to convince a bankruptcy judge, but a federal district court reversed, ruling that bankruptcy law does not distinguish between a regular IRA that is saved for retirement and an inherited IRA that can be spent immediately.

The 7th U.S. Circuit Court of Appeals then ruled against the couple. The Supreme Court took up the case to resolve a split on the issue among federal appeals courts.

The case is Clark v. Rameker, 13-299.

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