Clark V Rameker: US Supreme Court Rules That Inherited IRA’s Are Not Protected From Creditors

Presented to the Central Chapter of the Arizona Society of Enrolled Agents
July 22, 2014
By Thomas J. Murphy
Murphy Law Firm, Inc.


On June 12, 2014, the United States Supreme Court issued a unanimous 9-0 ruling that the creditors of a beneficiary of an inherited IRA can reach the assets of the IRA in a bankruptcy proceeding. Clark v. Rameker, 573 U.S. __ (2014). Specifically, the Court ruled that funds held in inherited IRA are not “retirement funds” within the meaning of 11 U.S.C. §522(b)(3)(C) and therefore not exempt from the bankruptcy estate under that code section.

We will discuss two aspects of this case:

  •  Would there be a different result if Ms Herron-Clarke lived in Arizona?
  • Is there still a way for any IRA owner outside of Arizona to protect his or her IRA from creditors of the IRA’s beneficiaries?

The answer to both questions is “yes”.

The case.

The case of Clark v. Rameker involved the interpretation of section 522(b)(3)(C) of the Bankruptcy Code that permits a debtor to exempt from the bankruptcy estate “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.”

The case involved a Wisconsin couple (Heidi Heffron-Clark and her husband Brandon Clark) who declared bankruptcy in 2010, and in their bankruptcy filing claimed that the remaining (approximately $300,000) balance of an inherited IRA that Heidi inherited from her mother Ruth back in 2001 should be protected under section 522(b)(3)(C). Bankruptcy trustee William Rameker contested the claimed exemption on the basis that an inherited IRA should not be treated as a retirement account for bankruptcy protection after the original IRA owner had passed away. Initially, the bankruptcy court sided with Rameker, In re Clark, 466 B. R. 135, 139 (WD Wisc. 2012) but the District Court reversed the decision, and the Seventh Circuit Court of Appeals disagreed again, siding with the original Rameker ruling and not the district court. In re Clark, 714 F. 3d 559 (2013).

This ruling created a split among the federal circuit Courts of Appeal, the highest appellate courts short of the US Supreme Court. A split of authority among the circuit courts will often lead, as here, to the involvement of the US Supreme Court to render a decision binding on all courts. Because the Seventh Circuit’s decision conflicted with prior decisions in the Eighth Circuit Bankruptcy Appellate Panel (In re Nessa, 426 B.R. 312 (B.A.P. 8th Cir. 2010) and the Fifth Circuit (In re Chilton, 674 F.3d 486 (2012).), the Supreme Court agreed last November to hear the case.

Here is the summary provided by the Supreme Court itself:

Held: Funds held in inherited IRAs are not “retirement funds” within the meaning of §522(b)(3)(C).

(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.

(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,”

(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.

(Ed note – this refers to Justice Ginsburg’s comment at oral argument that the Debtor “would have, I think, an airtight case if the statute didn’t use the words ‘retirement funds’ but just exempted funds in an account that is exempt from taxation.”)

Asset Protection 101 – protection from creditors and predators

To put the Rameker case in its proper context, a review of basic asset protection is helpful.

Basic asset protection is a four-legged stool. The first leg is retirement accounts. In Arizona, there is unlimited creditor protection for all funds held in a qualified account such as any 401k account, any form of an IRA (traditional, SEP, Roth, etc), any 403b account or any interest in a section 457 deferred compensation plan. ARS 33-1126(b).

The second leg is life insurance policies and annuity contracts that also have unlimited creditor protection in Arizona. This includes the cash surrender value if the life insurance policy has been owned for at least two years and names a family member as beneficiary. ARS 20-1131 & -1132 and 33-1126(a)(6)&(7).

The third leg is Arizona’s homestead protection for primary residences that protects $150,000 in the equity of the residence. ARS 33-1101

The forth leg protects certain forms of non-ERISA income, such as Social Security payments (42 USC 407), Civil Service retirement payments (5 USC 729 & 2265), most any other forms of pensions received in Arizona (ARS 9-931 & -968 & 23-783) and VA benefits (38 USC 352(e))

For a state-by-state analysis for creditor protection for IRAs, life insurance and annuities, use the following link:

Creditor protection of retirement accounts

The creditor protection afforded to retirement plan accounts involves the interplay of three different series of statutes:

  • Section 522(b) of the federal bankruptcy code that has already been cited
  • The anti-alienation requirements of ERISA and IRC — 29 U.S.C. §1056(d)(1) & 26 USC §401(a)(13)(A).
  • State laws that provide various amounts of protections to qualified plans. In Arizona, the applicable statute is ARS 33-1126(b) that provides unlimited creditor protection for all retirement plans. Florida, Ohio and Texas have similar statutes.

For the participant/owner of a retirement account, the combined effects of these statutes provide nearly bullet-proof protection from creditors.

Federal – non-bankruptcy

At the federal level, ERISA’s anti-alienation provision, 29 U.S.C. § 1056(d)(I), states: “Each pension plan shall provide that benefits provided under the plan may not be assigned or alienated.”A parallel nonalienation provision is found in Internal Revenue Code § 401(a)(13), that states “benefits provided under the plan may not be assigned or alienated.”   Likewise, IRS regulations state that “benefits provided under the plan may not be anticipated, assigned (either at law or in equity), alienated, or subject to attachment, garnishment, levy, execution or other legal or equitable process” Treas Reg section 1.401(a)-13(b)(1).

The US Supreme Court has been unequivocal in providing this protection. Patterson v. Shumate, 504 U.S. 753 (1992); Guidry v. Sheet Metal Workers, 493 U.S. 365 (1990)

There are a few – but only a few — chinks in the bullet-proof armor. There is an exception for liens, levies and judgments obtained by the IRS. IRC section 401(a)(13), Treas. Reg. section 1.401(a)-13(b). But note that the IRS has issued a field service memo’s (FSA 199930039 & Chief Counsel Advisory 200032004) advising that a retirement plan does not have to honor an IRS levy for taxes until the plan is in pay status.

This protection also does not apply to qualified domestic relations orders (QDROs), IRC section 401(a)(13)(B), ERISA section 206(d)(3).

Another exception is that up to 10% of any benefit in pay status may be voluntarily and revocably assigned or alienated. IRC section 401(a)(13)(A), Treas. Regs section 1.401(a)-13(d)(1), ERISA section 206(d)(2)

Federal – bankruptcy

As already mentioned, the federal bankruptcy code, 11 USC § 522(B)(3) & (d)(12) authorizes an individual debtor to exempt from property of the bankruptcy estate “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986”.

Sub paragraph (n) of that same statute does set a monetary limit on the protection afforded a debtor to $1.2 million in IRAs plus any funds rolled over from a ERISA plan. This limit does not apply to SEPs and SIMPLE IRAs, Sec. 403(b) plans, or Sec. 457(b) plans. The statute reads as follows:

“For assets in individual retirement accounts described in section 408 or 408A of the Internal Revenue Code of 1986, other than a simplified employee pension under section 408(k) of such Code or a simple retirement account under section 408(p) of such Code, the aggregate value of such assets exempted under this section, without regard to amounts attributable to rollover contributions under section 402(c), 402(e)(6), 403(a)(4), 403(a)(5), and 403(b)(8) of the Internal Revenue Code of 1986, and earnings thereon, shall not exceed $1,000,000 in a case filed by a debtor who is an individual, except that such amount may be increased if the interests of justice so require.”

Creditor protection under state law

Under Arizona law, the creditor protection for retirement plans is unlimited ARS 33-1126(b) states:

“Any money or other assets payable to a participant in or beneficiary of, or any interest of any participant or beneficiary in, a retirement plan under section 401(a), 403(a), 403(b), 408, 408A or 409 or a deferred compensation plan under section 457 of the United States internal revenue code of 1986, as amended, whether the beneficiary’s interest arises by inheritance, designation, appointment or otherwise, is exempt from all claims of creditors of the beneficiary or participant”.

In a bankruptcy setting in Arizona, the state law is key because Arizona is an “opt out” state. Section 522(b)(3) of the Bankruptcy Code allows states to permit or require their residents to use state law exemptions rather than the exemptions set forth in section 522(d) the Bankruptcy Code. Arizona is one of 33 states to opt out of the federal exemptions.

In Arizona, the state exemptions are much more generous than the federal exemptions and ARS 33-1133 requires Arizona residents to use the state exemptions (“residents of this state are not entitled to the federal exemptions provided in 11 U.S.C. 522 (d)”).

This means, unlike the Rameker case arising out of Wisconsin, the unlimited protection of IRAs under Arizona law was adopted in a 2011 bankruptcy case in Tucson, In Re Thiem, 443 B.R. 832 (Bankr. D. Ariz. 2011) which held that ARS § 33-1126(B) “does not limit the exemption to the person who contributed the funds, i.e., the owner or plan participant, but also entitles the beneficiary to receive the protection…..the Arizona statute expressly includes the beneficiary”.

Other states that have statutes with similar beneficiary language are Florida, Texas, Ohio, Alaska, Missouri, North Carolina and Idaho.

Back to Clark v Rameker

The Arizona statute, ARS 33-1126(b), would yield a different result since state law exemptions, not the federal bankruptcy exemption, applies. The IRA would be protected since Arizona is one of the aforementioned handful of states that provide creditor protection to IRA beneficiaries and not just the owner/participant of the IRA.

Non-Arizona beneficiary

What if the beneficiary does not live in Arizona? You might have a different result depending on the beneficiary’s state of residence.


The conventional post-Rameker wisdom is to designate a spendthrift trust as beneficiary with the children named as beneficiaries of the trust. The creditor protection nature of spendthrift trusts are universally recognized and respected. ARS 14-10502.

However, such trusts will need to comply with the minimum required distribution regulations that permit a trust to achieve the special status of “designated beneficiary” so that a “stretch-out” over the beneficiary’s life expectancy can be used. Treas. Reg. §1.401(a)(9)-4. This is most often done using a “conduit” trust whereby all MRDs are required to be passed through to the beneficiary in the year the funds are received. Treas. Reg. §1.401(a)(9)-5, A-7.

Another option is for the owner/participant to use IRA funds to purchase life insurance with a trust either owning the policy or being named as the beneficiary. The children would then be named as beneficiaries of the trust that would contain spendthrift provisions for creditor protection. But this would only be used if the owner/participant was confident that he or she had no need for the IRA funds used to purchase the policy.

Non-Arizona spouses

Would there be a different result if Ms Heffron-Clark was inheriting the IRA as a spouse rather than as a child? There has been much commentary on this and most commentators believe the answer is “yes”, the result would be different.

When a surviving spouse inherits a retirement plan from a deceased spouse, the surviving spouse may simply roll over the deceased spouse’s account into an IRA owned by the surviving spouse. The retirement funds become a new account or they can be added to an existing account of the surviving spouse. There are no MRDs until the spouse reaches the normal age 70 ½. If there is a spousal rollover, then there are penalties for early pre-59 ½ withdrawals.

These three factors that the Rameker court weighed so heavily are different from a non-spousal inherited account that was involved in the Clark case. Spousal inherited IRA funds can be rolled over into the surviving spouse’s own IRA and are subject to the typical retirement plan rules. Because of this, inherited spousal retirement plans funds are different than that of non-spousal inherited funds and most commentators believe this would take it out of the Court’s holding in Clark.

But Congress is looming….

Last month, the Senate Finance Committee began consideration of a bill that includes a revenue raising provision to accelerate certain beneficiary payouts in retirement accounts. Markup of the bill has been postponed until after the Senate recess.

The bill, the Preserving America’s Transit and Highways (PATH) Act, is intended to make solvent the federal Highway Trust Fund. It contains a revenue provision that would require most inherited retirement plan accounts to be paid to beneficiaries within five years of the account owner’s death. This would accelerate the taxation of retirement plan assets by eliminating the option for most beneficiaries to take life expectancy payments. Exceptions to this rule would include spouse beneficiaries, special-needs beneficiaries, beneficiaries who are minors, and non-spouse beneficiaries whose age is within 10 years of the decedent’s age.