Is an inherited individual retirement account a “retirement fund” under the Bankruptcy Code, and thus exempted from a debtor’s bankruptcy estate?
In October 2010, Heidi Heffron-Clark and Brandon Clark filed a voluntary joint Chapter 7 bankruptcy and claimed an inherited IRA under the retirement funds exemption of Section 522 of the Bankruptcy Code. The bankruptcy trustee and creditors objected to the claimed exemption. The district court concluded that inherited IRAs are exempted because they do not lose their character as retirement funds once they are passed onto the beneficiary. The Seventh Circuit Court of Appeals reversed the district court’s decision, stating that an inherited IRA does not qualify for a retirement fund exemption because it was not set aside for the debtor’s retirement. The United States Supreme Court must decide if an inherited IRA constitutes a “retirement fund” under Section 522. This case implicates debtors’ and creditors’ access to inherited IRAs once a debtor files for bankruptcy.
Whether 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.
Ruth Heffron established an Individual Retirement Account (“IRA”) and designated her daughter, Petitioner Heidi Heffron-Clark, as the sole beneficiary. See In re Clark, 714 F.3d 559, 560. When Ruth died in September 2001, the account, worth approximately $300,000, passed to Heidi.