The way inherited individual retirement funds are treated in a personal bankruptcy may well be up to the U.S. Supreme Court, thanks to a recent ruling from the 7th U.S. Circuit Court of Appeals. Maryland is not directly affected by this case — in fact, while three circuits have ruled on the issue, the 4th Circuit where we fall has not. If SCOTUS (the “insider’s” term for the Supreme Court of the United States) takes up the case, neither Maryland nor the 4th Circuit will have a chance to think about it.
The bankruptcy code protects certain assets when a debtor files for personal bankruptcy. It would be contrary to public policy to allow creditors access to, for example, the debtor’s home — the objective is not to punish the debtor by forcing him to live on the street.
The law also protects debtors’ retirement accounts, again because bankruptcy is not designed to be punitive and because the funds in an IRA are not typically available to a debtor until he is 59 1/2 years old. If he cannot spend the funds now, policymakers reasoned, he should not have to use the money to pay off current debts.
In the 7th Circuit case, the retirement fund did not strictly belong to either of the debtors, a married couple. The IRA had belonged to the wife’s mother; the wife inherited the $300,000 in the account when he rmother passed away. So the question for the bankruptcy trustee was, is this money exempt from creditors’ claims under the retirmeent fund exception?
The bankruptcy court said no. But that was not the end of the dispute.
We’ll continue this in our next post.
Source: Thomson Reuters News & Insight, “In circuit split, court says inherited IRA fair game in bankruptcy,” Nick Brown, April 24, 2013