UPDATE ON INHERITED IRA’S TARGETED BY CHAPTER 7 TRUSTEES AND THE FLORIDA EXEMPTION FOR INHERITED IRA’S

UPDATE ON INHERITED IRA’S TARGETED BY CHAPTER 7 TRUSTEES AND THE FLORIDA EXEMPTION FOR INHERITED IRA’S

The Supreme Court issued its opinion today in the Clark et ux. V. Rameker et al., inherited IRA case. While it may be bad news for some potential bankruptcy filers in other States, Florida filers with the ability to use Florida exemptions should continue to enjoy the protection of a 100% exemption for inherited retirement accounts.

As discussed in my previous writing on this subject, the coming wave of Baby Boomer inheritance IRAs and 401(k) funds will offer heirs a tremendous financial windfall. Debtor earned/owned accounts are two of the most common exemptions that are claimed in Chapter 7 or Chapter 13 cases. This means that the IRAs and 401(k) plans cannot be liquidated in a Chapter 7 filing or counted as liquidation in a Chapter 13 case. The accounts simply pass through the filing of a bankruptcy and will remain available for later income upon retirement.

However, in the Clark case, the Wife inherited a $300,000.00 IRA from her late mother. She immediatly rolled that amount into an exempt IRA in her own name. When their pizza business failed, the Clarks filed for Chapter 7 to discharge approximately $700,000.00 in business guarantee and personal debts. They claimed the IRA as exempt in the Chapter 7 filing.

Prior to that date, the 5th and 8th Circuits had ruled such inherited funds to be exempt. Undeterred, the Chapter 7 Trustee filed an exemption to the IRA in the Clark’s Chapter 7 case. Eventually, the 7th Circuit ended up with the case and ruled that the IRA was not exempt since the funds were inherited and not for the savings or retirement of the Clarks. The Supreme Court ruled on June 12, 2014 that the inherited IRA was not exempt from the claims of the Chapter 7 Trustee since such an IRA was not necessary for the basic support of the Debtor as is normally the case with a traditional retirement account.

While this may seem like it will mean that all inherited IRA accounts are subject to the liquidation of a Chapter 7 Trustee, the ruling of the Supreme Court was based upon the Federal Exemptions contained in 11 U.S.C. sec. 522. Florida is an “opt out” State, which means that all Florida filers of Chapter 7 who meet the requirements for claiming Florida exemptions will not use the Federal exemptions.

So what does Florida exemption law say about the exempt status of inherited IRA’s? On May 31, 2011, Florida Governor Scott signed into law House Bill 469. Now, section 222.21(2)(c) of the Florida Statutes serves to exempt from creditor claims the owner, beneficiary, or participant of a regular and inherited individual retirement account. The law also was written to apply retroactively to all inherited individual retirement accounts without regard to the date the account was created.

At Mickler & Mickler, we attend Court on a regular basis. We have the experience and knowledge to ensure that you receive the correct advice when confronted with difficult financial decisions related to filing bankruptcy. Contact us at 904.725.0822 or bkmickler@planlaw.com.

Bryan K. Mickler