US Supreme Court Rules on Inherited IRAs. How does it Impact Florida Debtors?

Supreme Rules Inherited IRAs Subject to Creditors’ Claims.
On June 14, 2014 the United States Supreme Court in BRANDON C. CLARK ET UX., Petitioners, v. WILLIAM J. RAMEKER, TRUSTEE, ET AL. Case No. 13-299 (“Clark v. Rameker”) decided that the assets held by a Chapter 7 Debtor in a so-called “Inherited IRA” were not exempt from the Debtor’s Creditors in Bankruptcy. The situation involved a traditional IRA established by the one of the Debtor’s mothers that was inherited by that Debtor upon her mother’s death. After filing Chapter 7 Bankruptcy the daughter claimed the Inherited IRA as exempt under 11 USC §522 (b)(3)(C) which provides that “(C) retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986” are exempt from the creditors of a Debtor in Bankruptcy.

The Supreme Court distinguished an Inherited IRA under the Internal Revenue Code by finding that:

 “Inherited IRAs do not operate like ordinary IRAs. Unlike with a traditional or Roth IRA, an individual may withdraw funds from an inherited IRA at any time, without paying a tax penalty. §72(t)(2)(A)(ii). Indeed, the owner of an inherited IRA not only may but must withdraw its funds: The owner must either withdraw the entire balance in the account within five years of the original owner’s death or take minimum distributions on an annual basis. See §§408(a)(6), 401(a) (9)(B); 26 CFR §1.408-8 (2013) (Q-1 and A-1(a) incorporating §1.401(a)(9)-3 (Q-1 and A-1(a))); see generally D. Cartano, Taxation of Individual Retirement Accounts §32.02[A] (2013). And unlike with a traditional or Roth IRA, the owner of an inherited IRA may never make contributions to the account. 26 U. S. C. §219(d)(4).” (Clark v. Rameker at 1).

 The Supreme Court then held that funds in an Inherited IRA are not exempt from creditors and are subject to being used by the Bankruptcy Trustee to repay creditors. Much of the decision hinged on the Supreme Court’s interpretation of the term “retirement funds” in 11 U.S.C. §522(b)(3)(C).

What does this mean to you?
In 2011, the Florida Legislature amended §221.22(2)(c) FL Stat Ann (1998) to provide that “Any money or other assets or any interest in any fund or account that is exempt from claims of creditors of the owner, beneficiary, or participant under paragraph (a) does not cease to be exempt after the owner’s death by reason of a direct transfer or eligible rollover that is excluded from gross income under the Internal Revenue Code of 1986, including, but not limited to, a direct transfer or eligible rollover to an inherited individual retirement account as defined in s. 408(d)(3) of the Internal Revenue Code of 1986, as amended.”

The statute was amended to “correct” the ruling in Robertson v. Deeb 16 So. 3rd 936 (DCA 2nd Cir, 2009) that had held that “Because the plain language of section 222.21(2)(a) references only the original “fund or account” and the tax consequences of inherited IRAs like the one in this case render them a completely separate “fund or account,” such inherited IRAs are not exempt under that section. Accordingly, we affirm the order denying” (Robertson at 939).

Even after Clark v. Rameker, the amount held in an Inherited IRA is not included in the gross income of the beneficiary under the Internal Revenue Code upon its transfer to the beneficiary after the death of the owner, but rather the amounts in the Inherited IRA become gross income to the beneficiary only when withdrawn. A Florida debtor would argue that the interpretation of 11 U.S.C. §522 (b)(3)(C) in Clark v. Rameker that hinges on the interpretation of “retirement funds” and the distinct difference between the original IRA and an Inherited IRA under the Internal Revenue Code does not invalidate the Florida exemptions, since the provisions of §222.21(2)(c) FL Stat Ann (1998) create a separate Florida State exemption for Inherited IRAs that is based on the Inherited IRA being excluded from gross income when transferred to the beneficiary under the Internal Revenue Code.

Thoughts: (i) Since a Florida Debtor would be relying heavily on Florida State exemptions to get around Clark v. Rameker for an Inherited IRA and people move from state to state, if the Debtor inheriting the IRA is a spouse, it is still prudent to roll over the Inherited IRA into a traditional IRA and (ii) if you represent a Debtor that wants to file in Florida to take advantage of the Florida exemptions, including the exemption for an Inherited IRA make sure that venue is proper in Florida and check the case law to make sure the Bankruptcy Courts in Florida have upheld or at least not overturned the distinction between the Florida exemptions for Inherited IRAs and the holding in Clark v. Rameker.

As with most issues, time and court decisions will clarify the impact of Clark v. Rameker for the Debtor filing in Florida Bankruptcy Court.

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