Recently, the Court of Appeals for the Seventh Circuit, in In re Clark, adopted a new approach to the treatment of non-spousal inherited individual retirement accounts (hereinafter referred to as IRAs) in bankruptcy cases. This case exemplified a typical situation in which a debtor inherits a non-spousal IRA, and then files for bankruptcy. Often times this debtor will claim that the non-spousal, inherited IRA is a “retirement account” that is exempt from the bankruptcy estate under sections 522(b)(3)(C) and (d)(12) of the Bankruptcy Code. However, frequently the trustee managing the bankruptcy estate will object to the debtor’s proposed exemption, claiming that the non-spousal inherited IRA is not a “retirement account” under the the Bankruptcy Code. Currently, the circuits have split as to whether non-spousal inherited IRAs are exempt “retirement funds.”
The majority of circuits have held that non-spousal inherited IRAs are “retirement funds” and are therefore exempt from the bankruptcy estate under sections 522(b)(3)(C) and (d)(12). Recently, however, in In re Clark, the Seventh Circuit disagreed with the majority approach and held that a non-spousal inherited IRA was not exempt because it was not considered a “retirement fund” under the Internal Revenue Code.
In November 2013, the Supreme Court decided to hear the case of Clark v. Rameker in order to resolve the circuit split. If the Court sides with the Seventh Circuit, it will prevent debtors from exempting non-spousal inherited IRAs. Such a holding would significantly affect debtors who own non-spousal inherited IRAs and would need to be taken into consideration when such debtors decide whether or not to file for bankruptcy.