Inherited IRAs in Bankruptcy

When an individual files for bankruptcy his or her assets become part of the Bankruptcy Estate. Section 522 of the Bankruptcy Code, however, allows Debtors to exempt certain types of real and personal property from their Bankruptcy filing. Both Florida and Federal exemptions specifically allow for debtors to exempt most types of retirement accounts such as 401(k)s and IRAs. Recently, however, some Chapter 7 trustees have begun to challenge this exemption when it applies to Inherited IRAs. An Inherited IRA is a traditional or Roth IRA that has been inherited after its owner’s death. If the heir is the owner’s spouse, as is often the case, the spouse has a choice: He or she may “roll over” the IRA funds into his or her own IRA, or he or she may keep the IRA as an Inherited IRA. When anyone other than the owner’s spouse inherits the IRA, he or she may not roll over the funds; the only option is to hold the IRA as an inherited account.

Bankruptcy courts and Judges had been split as to whether or not Inherited IRA’s are exempt under Federal Bankruptcy Exemptions. Recently, however, the United States Supreme Court ruled that Inherited IRAs are not exempt pursuant to the Bankruptcy Code’s exemption for IRA accounts. In a unanimous decision, the Supreme Court held that the bankruptcy law is intended to exempt money that the debtor deferred from his own earnings to pay for future retirement. The court reasoned that an inherited IRA, although called an “IRA”, is more of a windfall inheritance from a third party’s labors and savings, and this money should be made available to pay the debtor’s creditors. The case is Clark v. Rameker, 134 S.Ct. 2242 (2014).

This decision, however, will not affect most bankruptcy filers in Florida as the state of Florida has specifically opted out of the Federal Exemption scheme in exchange for its own bankruptcy exemptions outlined in the Florida Statutes. The State Legislature recently amended these statutes to specifically exempt Inherited IRAs from the Bankruptcy Estate. As such, Inherited IRAs are exempt for Florida residents in Bankruptcy.

Jonathan Bierfeld is an attorney with Martin Law Firm, P.L., whose practice focuses in Bankruptcy Law and Civil Litigation. He is admitted to practice law in the State of Florida and the Federal Court for the Middle District of Florida. He primarily practices in Lee County Florida in Cape Coral and Fort Myers, Florida.