Inherited IRAs May Be Exempt in Bankruptcy

Several years ago, the U.S. Supreme Court said heirs who inherited IRAs could not protect these assets under the federal Bankruptcy Code when they filed for bankruptcy (Clark v. Rameker, S.Ct., 573 U.S. 122 (2014)). However, a recent district court decision has shown there may be protection for heirs in some situations (Frederick Michael Arehart, BC-DC ID, 1/10/19).

In the recent case, a person who filed from bankruptcy had inherited an IRA from his mother. As a non-spouse beneficiary, he couldn’t (and did not) make any personal contributions to the inherited account. When he filed for bankruptcy, the IRA was valued at over $78,000. He claimed the account was wholly exempt under Idaho bankruptcy law. The trustee in bankruptcy disagreed, but the court (U.S. Bankruptcy Court, District of Idaho) agreed that the exemption applied to the inherited IRA.

Under Idaho law, inherited IRAs are exempt because it comports with Idaho policy to protect the retirement income of its citizens. The court, noting that the state legislature “painted with a broad brush,” concluded that retirement income means income not only from qualified retirement plans, such as 401(k)s, but also from IRAs and Roth IRAs. There had been previous court decisions in the state reaching the same conclusion and the court noted that the legislature did not choose to amend its statute following the Supreme Court decision.

Note: A number of states, including Florida and Texas, specifically exempt inherited IRAs under state bankruptcy rules. Check with your state.