Opening a restaurant isn’t an easy venture — just look at the many television series based on turning around a failing establishment. When starting a business, individuals hope that it will succeed, but likely know what is on the line if it doesn’t. Bankruptcy is a good solution in a situation involving a struggling business in Maryland, but what assets really are on the line?
Retirement assets are something that individuals often keep apart from investments. After all, it is the money that they’ll rely on to live later in life. The general rule is that retirement accounts are exempt from creditor claims during bankruptcy. What about accounts that are inherited? The Supreme Court of the United States is scheduled to decide this exact issue based on a case involving the owners of a small pizza shop.
In this case, the owners had the dream of running a pizza parlor in their hometown. That dream was built, but after approximately five years, the couple couldn’t hold on to it anymore. Their creditors included a landlord, mortgage lenders and trade creditors, amongst others.
By the time they filed for bankruptcy, the total debt liability was $700,000, and creditors knew that the $300,000 in the wife’s inherited IRA could go a long way in satisfying a portion of the claims.
The couple argued that retirement funds were exempt under bankruptcy law. The bankruptcy trustee disagreed, and eventually the case was brought to the 7th Circuit U.S. Court of Appeals. This court determined that an inherited IRA has different properties that set it outside of the retirement exemption.
It was a retirement fund for the purpose of the individuals that created it, said the court. Once it has been inherited, distributions must be made to the new beneficiary within one year of inheritance and end within five years. Thus, it’s not reserved for the benefit of “retirement.”
Other circuit courts have disagreed with this ruling, declaring that an Individual Retirement Account retains its retirement status and thus exemption status even after it passes to another.
Does the word “retirement” qualify an asset as such, or does it have to walk like one and talk like one too? We’ll have to wait for the Supreme Court’s decision on this issue.
Source: Reuters, “U.S. high court to chart fate of inherited IRAs in bankruptcy,” Nick Brown, Nov. 26, 2013