US Supreme Court says Inherited IRAs are NOT exempt in Bankruptcy

In a decision issued today, the US Supreme Court has ruled that when a person inherits an IRA, 401K or similar retirement account from another person that retirement account is not exempt in Bankruptcy. This is an important development since the most recent case in the Fifth Circuit (which covers Texas) reached the opposite conclusion.

This means that people who inherit IRAs or 401Ks or even Roth IRAs from someone else must carefully consider how to use those funds. The Supreme Court stated, “nothing about the inherited IRA’s legal characteristics would prevent … the individual from using the entire balance of the account on … a sports car immediately after her bankruptcy proceedings are complete. Allowing that kind of exemption would convert the … Code’s purposes into a ‘free pass.’ We decline to read the retirement funds provision in that manner.” Clark v. Rameker, Trustee 573 U.S. ____ at ____ (2014).

The Bankruptcy Code creates a dynamic ever changing playing field for Debtors and Creditors.

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