Clark v. Rameker

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LII note: The U.S. Supreme Court has now decided Clark v. Rameker.


Is an inherited individual retirement account a “retirement fund” under the Bankruptcy Code, and thus exempted from a debtor’s bankruptcy estate?

Oral argument: 
March 24, 2014

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.

Questions as Framed for the Court by the Parties 

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. When Ruth died in September 2001, the account, worth approximately $300,000, passed to Heidi. Heffron-Clark then established a Beneficiary IRA (also known as an “inherited IRA”) and transferred the remaining balance from her mother’s IRA account into the inherited IRA. In October 2010, Heffron-Clark and her husband Brandon Clark filed for Chapter 7 bankruptcy relief under federal bankruptcy law. Heffron-Clark and her husband claimed the inherited IRA as exempt under 11. U.S.C. § 522(b)(3)(C) of the Bankruptcy Code, which exempts retirement funds that fall within certain provisions of the Internal Revenue Code of 1986. Subsequently, Respondent William Rameker, the bankruptcy trustee, and judgment creditors Resul and Zinije Adili objected to the debtor’s exemption for the inherited IRA.

In May 2011, the bankruptcy court sustained Rameker’s objection and held that the inherited IRA was not exempt under 11. U.S.C. § 522(b)(3)(C) because the account did not represent “retirement funds” following Ruth Heffron’s death. In holding that the money did not represent “retirement funds,” the judge reasoned that because the money wasn’t being held in contemplation of the retirement of the current owners, and because the inherited IRA is fundamentally different from an IRA, the money was not exempt under 11. U.S.C. § 522(b)(3)(C) or (d)(12). The district judge reversed, adopting the Eighth Circuit’s holding in In re Nessa, later affirmed by the Fifth Circuit in In re Chilton, that the term “retirement funds” refers to “any account that contained such funds, as long as the funds had been accumulated for retirement purposes originally.”

On appeal, the Seventh Circuit Court of Appeals disagreed with the district judge and the Fifth and Eighth Circuit decisions, siding with Rameker and the bankruptcy judge in not exempting the inherited IRA because the account did not represent anyone’s retirement funds. The court concluded that “inherited IRAs represent an opportunity for current consumption, not a fund of retirement savings.” Furthermore, the court focused on the difference between the IRA and the inherited IRA, explaining that unlike a typical IRA, “an inherited IRA is a time limited tax-deferral vehicle … not a place to hold wealth for use after the new owner’s retirement.” Additionally, the court reasoned that to exempt the account under 11. U.S.C. § 522(b)(3)(C) or (d)(12) “would be to shelter from creditors a pot of money that can be used freely for current consumption…throw[ing] creditors’ claims to the wolves in order to enhance savings and bequest motives.” Finally, the court emphasized that the exemption must depend on how Heffron-Clark used the property, not how her mother used it. The Supreme Court granted certiorari on November 26, 2013.



This case presents the Supreme Court with the opportunity to settle a circuit split over whether non-spousal inherited IRAs are exempt in bankruptcy proceedings. Clark, the debtor, argues that the plain language of the “retirement funds” exemption in 11. U.S.C. § 522 exempts funds that have been set aside for retirement and are tax-exempt. In her view, this exemption includes inherited IRAs which were originally set aside for retirement. Rameker, the trustee, argues that funds held in inherited IRAs are not “retirement funds” and should not be exempt under § 522 of the Bankruptcy Code. The Supreme Court’s determination will impact bankruptcy settlements between debtors and creditors and may impact families’ estate planning and inheritance decisions.


Clark’s supporters argue that Congress drafted and intended the retirement funds exemption to be broad and straightforward. For example, the National Association of Consumer Bankruptcy Attorneys (“NACBA”) argues that the plain language of the retirement-funds exemption is consistent with Congress’s intent to create a uniform exemption for all types of tax-exempt retirement plans. Others argue that interpreting the statute to not protect “non-spousal” inherited IRAs would undermine Congress’s goal of protecting retirement savings for retirees’ dependents. Professor G. Eric Brunstad, Jr., argues that to further the Bankruptcy Code’s fresh-start policy, Congress enacted section 522 to protect tax-favored retirement plans. Accordingly, he argues that statute should be narrowly construed to permit a debtor to retain property so he is not left destitute and a public charge.

Rameker argues that non-spousal inherited IRAs should not be exempt. Doing so, he argues, would upset the careful balance between creditor and debtor interests that Congress established in the Bankruptcy Code. Rameker argues that Congress created the bankruptcy exemptions to give debtors a fresh start, not to protect accounts like inherited IRAs, which hold liquid assets that can be used at any time and are not set aside for retirement. Rameker further argues that Congress included clear limitations by explicitly exempting only “retirement funds” held in retirement accounts.


In support of Clark, the NACBA argues that interpreting section 522 as not exempting non-spousal inherited IRAs would sacrifice the efficiency and simplicity of the uniform exemption for retirement funds. In turn, the NACBA contends, this would create confusion and open a Pandora’s box of litigation around the term “retirement funds.” Furthermore, the group argues, this uncertainty over the retirement funds exemption would open the door to a host of practical problems, making it impossible to know which of the Seventh Circuit’s tests to apply in different factual scenarios. Professor Brunstad argues that applying the uniform tax-exempt standard applied by other circuits would avoid costly litigation and countless judicial inquiries into the economic and subjective attributes of a fund to determine whether it qualifies as “retirement funds.”

Rameker counters that the defining feature of most IRAs is that they are subject to unique taxation rules designed to encourage saving for retirement. According to Professor Seymour Goldberg, inherited IRAs are better characterized as anti-retirement funds because they are structured to require immediate consumption of the funds rather than to promote long-term savings for the future. Furthermore, Rameker contends, if Congress intended to exempt money based only on tax-exempt status, it could have said so, but instead, it extended protection only to “retirement funds” held in tax-exempt accounts.

In sum, this case gives the Supreme Court an opportunity to settle a circuit split and to determine whether non-spousal inherited IRAs are an exempt asset for purposes of bankruptcy proceedings. The Court’s interpretation of § 522 will impact future bankruptcy settlements between debtors and creditors and will likely affect families’ estate planning and inheritance decisions.



The Court will determine if an inherited individual retirement account (“IRA”) is exempt from bankruptcy proceedings under the “retirement fund” exemption in Section 522 of the Bankruptcy Code. Clark argues that inherited IRAs are covered as a retirement fund under the plain language of the statute. Rameker argues that inherited IRAs are not retirement funds and should not be treated like retirement funds. Clark further contends that Congress intended to include retirement funds as part of § 522. Rameker, on the other hand, argues that unlike actual retirement funds, inherited IRAs do not incur a fee for early removal, and thus they may not be kept until retirement.


Clark argues that an IRA account is a retirement fund. In her view, because the money in an IRA is set aside for retirement, it remains a retirement fund so long as it is in the account. Clark argues that this characteristic applies to all retirement funds that are exempt under § 522. According to Clark, Congress clarified this exemption to include retirement funds in the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”). In her view, the fact that an individual must take out funds does not preempt them from being retirement funds; a beneficiary’s intentions for the funds are not important as long as the funds stay in the retirement account. For example, Clark notes that section 522(b)(4)(C) states that transferring retirement funds to another exempt account does not prevent the funds from being considered retirement funds. Additionally, Clark emphasizes that this is precisely the mechanism that a beneficiary uses to acquire a decedent’s IRA.

Rameker argues that an inherited IRA is not exempt under § 522 because it is not a retirement fund. Rameker argues that § 522 allows retirement funds to be exempt if they are held in a statutorily-specified tax-exempt account. In Rameker’s view, the Court should adopt the ordinary meaning of retirement funds because that phrase is not defined in the Bankruptcy Code. Rameker argues that the definition of a retirement fund is a “sum of money set aside for the day when an individual stops working.” In his view, the retirement fund standard is objective and only exempts funds held in tax-exempt accounts that Congress intended to serve as vehicles for retirement savings. Rameker asserts that Clark is rewriting the statute instead of interpreting it. Additionally, Rameker argues that Clark’s interpretation of the statute effectively reads out the term “retirement funds.”


Clark argues that when statutory text is unambiguous, a court need not analyze its meaning any further, unless the interpretation of the text is absurd. Clark stresses that interpreting retirement funds to include inherited IRAs is not absurd. To the contrary, Clark argues that this interpretation is consistent with several legislative objectives, such as protecting tax-favored retirement plans not already under federal protection. Clark adds that Congress tied the bankruptcy exemption for retirement funds to those that are tax-exempt as well. Moreover, Clark notes that inherited IRAs are statutorily-defined as “retirement accounts” and are accorded tax-exempt status; therefore they should be given the same consideration that they are afforded when they are held by the initial owner. Another legislative objective, Clark argues, is allowing beneficiaries to use inherited IRAs as long-term financial planning tools. According to Clark, Congress enacted changes to the Internal Revenue Code to make it easier for beneficiaries to grow funds in inherited IRAs. Lastly, Clark argues that the retirement fund exemption furthers the government’s interest in encouraging individuals to save for retirement, evidenced by favorable tax exemptions covered in retirement plans. Clark notes that seven states have enacted exemptions that cover inherited IRAs.

Rameker counters that an inherited IRA is different from a traditional IRA. Rameker notes that the Court decided in Rousey v. Jacoway that § 522 allows debtors to exempt funds in traditional IRAs. According to Rameker, traditional IRAs are meant to be used as retirement funds and encourage people to save for retirement. Although Roth IRAs are different than traditional IRAs, Rameker contends that the Court allowed Roth IRAs to be treated as retirement funds because, like traditional retirement funds, they encourage savings and penalize early withdrawals. However, Rameker differentiates inherited IRAs (except for spouses who elect to treat it like their own IRA) in three ways. Rameker argues that inherited IRAs (1) do not incur a tax penalty on early withdrawal of funds, (2) have special required minimum distribution rules, and (3) cannot augment the beneficiary’s own retirement fund.


Clark argues that the Court of Appeals’ reasoning cannot be reconciled with the plain language of the statute. In Clark’s view, the court erred in concluding that inherited IRAs are not exempt under the “retirement funds” exemption because the exemption only covers savings accounts for the debtor’s own retirement. According to Clark, the court reasoned that once a beneficiary is entitled to an account, it is no longer meant for the owner after the owner stops working. Clark argues that the court incorrectly read into the statute an unstated interpretation. Further, Clark asserts that Congress purposely chose the term “retirement funds” instead of stating “funds that are meant for the debtor’s retirement.” Moreover, in Clark’s view, the lower court’s policy arguments for not exempting inherited IRAs should be ignored because it is inconsistent with the statute’s plain meaning. Clark further argues that the lower court erred in stating that inherited IRAs must be distributed before a beneficiaries’ retirement; in fact, Clark contends, inherited IRAs, like traditional IRAs, are determined according to a beneficiaries’ life expectancy.

Rameker argues that the Court of Appeals correctly held that inherited IRAs are not retirement funds under the Bankruptcy Code. Rameker argues that inherited IRAs are not meant for retirement like other tax-exempt “retirement funds.” Because the treatment of an inherited IRA changes once an owner dies, Rameker argues that an inherited IRA is no longer a retirement fund. Rameker notes that the rules requiring beneficiaries to start taking distributions from inherited IRAs before retirement shows that they are not, in fact, retirement accounts. Additionally, Rameker asserts that the purpose of the funds is very important in determining whether they are exempt in bankruptcy proceedings. Rameker contends that exempt funds in bankruptcy proceedings are those that facilitate a living. Specifically, he argues that the purpose of the bankruptcy exemptions is to allow the debtor to maintain their basic necessities. In his view, inherited IRAs fall outside this purpose.



The Court will decide whether an inherited IRA is an exempted “retirement fund” under the Bankruptcy Code. In deciding this question, the Court will address whether a beneficiary’s access to an IRA prevents the account from being a retirement fund. Clark argues that § 522 of the Bankruptcy Code includes inherited IRAs, evidenced by unamibigous statutory language and Congress’s intent. Rameker argues that inherited IRAs are not meant to be exempted like other retirement funds because they must be taken out, without any consequences, before a beneficiaries' retirement. The Court’s decision will have wide ranging implications for parties' access to funds in inherited IRAs during bankruptcy proceedings.


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