“The whole world is a court case…and we’re all…defendants” ~ Emma Chase
Heidi Clark inherited an IRA from her mother. She then ran into financial difficulties and filed for bankruptcy protection claiming that the IRA was protected under applicable bankruptcy laws as “retirement account.” The bankruptcy trustee challenged this characterization – and won, which was affirmed by the Supreme Court of the United States in Clark v. Rameker.
Basically,the SCOTUS reasoned that an inherited IRA is no longer a true “retirement account” after the death of the original owner because the funds can be accessed by the beneficiary without penalty and were not accumulated by the beneficiary for retirement purposes. Unfortunately, the reasoning is sound because a judgment creditor always stands in the shoes of a judgment debtor from an asset protection perspective. In other words, if a judgment debtor can access funds, then so can a judgment creditor — absent a specific exemption from seizure under state law.
The U.S. Supreme Court decision of Clark v. Rameker sent shock waves through the asset protection community. To minimize the negative impact of the holding, a spouse beneficiary should consider rolling an inherited IRA into their own IRA to ensure continued characterization as “retirement funds.” A spousal rollover is not available for a non-spouse (child) beneficiary, so consideration should be given to using an IRA Trust for a non-spouse beneficiary.