The Supreme Court has unanimously ruled in Clark v. Rameker, No. 13-299, 573 U.S. ___ (2014) (slip op.), that an inherited IRA is not exempt property of a debtor under 11 U.S.C. § 522 of the Bankruptcy Code.

Background:  Ruth Heffron established a traditional IRA and named her daughter, Heidi Heffron-Clark, as sole beneficiary.  When Ruth Heffron died, the IRA passed to Heidi Heffron-Clark.  Nine years later Ms. Heffron-Clark filed bankruptcy under Chapter 7 of the Bankruptcy Code and listed the inherited IRA as exempt property under 11 U.S.C. § 522(b)(3)(C).  The Chapter 7 bankruptcy trustee and unsecured creditors objected to the exemption, claiming that funds were not “retirement funds” within the meaning of § 522(b)(3)(C) and therefore should be used to repay creditors.  The bankruptcy court disallowed the exemption, the district court reversed the bankruptcy court on appeal, and the Seventh Circuit reversed the district court.

Opinion:   The Supreme Court agreed with the bankruptcy court and the Seventh Circuit that funds in an inherited IRA are not exempt under § 522 of the Bankruptcy Code.  The Clark Court premised its ruling on the conclusion that the ordinary meaning of the words “retirement funds” in § 522(b)(3)(C) is “sums of money set aside for the day an individual stops working.”  Clark, No. 13-299 (slip op., at 5).  The Court then concluded that whether funds constitute “retirement funds” depends on the objective use of the account in which the funds are kept, rather than a debtor’s subjective intent concerning how to use the funds.  Accordingly, funds in an inherited IRA are not “retirement funds” because a debtor cannot make additional investments in the account, must withdraw funds regardless of how far from retirement the person is, and may withdraw all the money at any time without penalty.

Legal Implications:  Spouses who inherit an IRA may still claim an inherited IRA as exempt.  Colorado residents are not directly affected by the Rameker decision, because Colorado residents are permitted to claim an exemption created under state law for “property, including funds, held in or payable from any pension or retirement plan or deferred compensation plan.”  C.R.S. 13-54-102.   The question is whether Colorado’s exemption for “retirement plan” will be interpreted to include inherited IRAs by a non-spouse.  No case has squarely addressed that issue, but the Colorado Court of Appeals has interpreted the plain language of “retirement plan” to mean

a systematic arrangement established by an employer for guaranteeing an income to employees upon retirement according to definitely established rules with or without employee contributions;

  1. a plan or account created by an employer, the principal, or another individual to provide retirement benefits or deferred compensation of which the principal is a participant, beneficiary, or owner,
  2. an employee benefit plan . . . provided by an employer (or a self-employed person) for an employee’s retirement.

Dillabaugh v. Ellerton, 259 P.3d 550, 552 (Colo. App. 2011).   Thus, Colorado’s exemption for “retirement plans” has similarly been interpreted to mean a plan setting aside money for retirement.   A non-spouse inherited IRA would likely not meet that requirement for the same reasons that the Supreme Court determined an inherited IRA does not contain “retirement funds”—a non-spouse inherited IRA simply has no connection to the beneficiary’s retirement.

David M. Little