Clark v. Rameker Supreme Court Inherited IRA Opinion FULL TEXT

SOTOMAYOR, J., delivered the opinion for a unanimous Court.

When petitioners filed for Chapter 7 bankruptcy, they sought to exclude roughly $300,000 in an inherited individual retirement account (IRA) from the bankruptcy estate using the "retirement funds" exemption. See 11 U. S. C. §522(b)(3)(C). The Bankruptcy Court concluded that an inherited IRA does not share the same characteristics as a traditional IRA and disallowed the exemption. The District Court reversed, explaining that the exemption covers any account in which the funds were originally accumulated for retirement purposes. The Seventh Circuit disagreed and reversed the District Court.

Held: Funds held in inherited IRAs are not "retirement funds" within the meaning of §522(b)(3)(C). Pp. 4-11.

(a) The ordinary meaning of "retirement funds" is properly understood to be sums of money set aside for the day an individual stops working. Three legal characteristics of inherited IRAs provide objective evidence that they do not contain such funds. First, the holder of an inherited IRA may never invest additional money in the account. 26 U. S. C. §219(d)(4). Second, holders of inherited IRAs are required to withdraw money from the accounts, no matter how far they are from retirement. §§408(a)(6), 401(a)(9)(B). Finally, the holder of an inherited IRA may withdraw the entire balance of the account at anytime-and use it for any purpose-without penalty. Pp. 4-6.

(b) This reading is consistent with the purpose of the Bankruptcy Code's exemption provisions, which effectuate a careful balance between the creditor's interest in recovering assets and the debtor's interest in protecting essential needs. Allowing debtors to protect funds in traditional and Roth IRAs ensures that debtors will be able to meet their basic needs during their retirement years. By contrast,nothing about an inherited IRA's legal characteristics prevent or discourage an individual from using the entire balance immediately after bankruptcy for purposes of current consumption. The "retirement funds" exemption should not be read in a manner that would convert the bankruptcy objective of protecting debtors' basic needs into a"free pass," Schwab v. Reilly, 560 U. S. 770, 791. Pp. 6-7.

(c) Petitioners' counterarguments do not overcome the statute's text and purpose. Their claim that funds in an inherited IRA are retirement funds because, at some point, they were set aside for retirement, conflicts with ordinary usage and would render the term"retirement funds," as used in §522(b)(3)(C), superfluous. Congress could have achieved the exact same result without specifying the funds as "retirement funds." And the absence of the phrase "debtor's interest," which appears in many other §522 exemptions, does not indicate that §522(b)(3)(C) covers funds intended for someone else's retirement. Where used, that phrase works to limit the value of the asset that the debtor may exempt from her estate, not to distinguish between a debtor's assets and the assets of another. Also unpersuasive is petitioners' argument that §522(b)(3)(C)'s sentence structure- i.e., a broad category, here, "retirement funds," followed by limiting language, here, "to the extent that"-prevents the broad category from performing any independent limiting work. This is not the only way in which the phrase "to the extent that" may be read, and this argument reintroduces the problem that makes the term "retirement funds" superfluous. Finally, the possibility that an account holder can leave an inherited IRA intact until retirement and take only the required minimum distributions does not mean that an inherited IRA bears the legal characteristics of retirement funds. Pp. 8-11.

714 F. 3d 559, affirmed.

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In 2000, Ruth Heffron established a traditional IRA and named her daughter, Heidi Heffron-Clark, as the sole beneficiary of the account. When Ms. Heffron died in 2001, her IRA-which was then worth just over $450,000-passed to her daughter and became an inherited IRA. Ms. Heffron-Clark elected to take monthly distributions from the account. In October 2010, Ms. Heffron-Clark and her husband, petitioners in this Court, filed a Chapter 7 bankruptcy petition. They identified the inherited IRA, by then worth roughly $300,000, as exempt from the bankruptcy estate under 11 U. S. C. §522(b)(3)(C). Respondents, the bankruptcy trustee and unsecured creditors of the estate, objected to the claimed exemption on the ground that thefunds in the inherited IRA were not "retirement funds" within the meaning of the statute. The Bankruptcy Court agreed, disallowing the exemption.

Page 3 of the Opinion

We disagree. In ordinary usage, to speak of a person's "retirement funds" implies that the funds are currently in an account set aside for retirement, not that they were set aside for that purpose at some prior date by an entirelydifferent person. Under petitioners' contrary logic, if an individual withdraws money from a traditional IRA andgives it to a friend who then deposits it into a checking account, that money should be forever deemed "retirementfunds" because it was originally set aside for retirement.That is plainly incorrect.

Page 7 of the Opinion

We disagree. In ordinary usage, to speak of a person's "retirement funds" implies that the funds are currently in an account set aside for retirement, not that they were set aside for that purpose at some prior date by an entirelydifferent person. Under petitioners' contrary logic, if an individual withdraws money from a traditional IRA andgives it to a friend who then deposits it into a checking account, that money should be forever deemed "retirementfunds" because it was originally set aside for retirement.That is plainly incorrect.

Page 8 of the Opinion

Finally, petitioners argue that even under the inquiry we have described, funds in inherited IRAs should still qualify as "retirement funds" because the holder of suchan account can leave much of its value intact until her retirement if she invests wisely and chooses to take onlythe minimum annual distributions required by law. See Brief for Petitioners 27-28. But the possibility that some investors may use their inherited IRAs for retirementpurposes does not mean that inherited IRAs bear the defining legal characteristics of retirement funds. Were it any other way, money in an ordinary checking account (or,for that matter, an envelope of $20 bills) would also amount to "retirement funds" because it is possible for anowner to use those funds for retirement.

Page 11 of the Opinion.

• Clark
• Rameker
• Supreme Court
• IRA
• BrokeAndBroker
• Bill Singer