These same rates are used in connection with sales to defective grantor trusts.Inherited IRAs are not exempt from creditors In Clark v. Ramekers, 573 U.S. (June 12, 2014) the United States Supreme Court addressed the issue of whether funds held in an inherited IRA are exempt from bankruptcy creditors under 11 U.S.C. § 522(b)(3)(C), ultimately holding that such funds are not exempt because they do not constitute "retirement funds" within the meaning of § 522(b)(3)(C). At issue in Clark was an inherited IRA owned by Heidi Heffron-Clark ("Heidi").

Certain assets, however, may be “exempt” from the bankruptcy estate, and the debtor may keep those assets after he emerges from bankruptcy. 11 U.S.C. § 522(b)(1). The Code lists a number of exemptions that may be used unless prohibited by state law.

In Clark v. Rameker, the United States Supreme Court recently heard argument to decide the issue of whether an inherited non-spousal individual retirement (“IRA”) account represents exempt “retirement funds” under §522 of the Bankruptcy Code (11 U.S.C. § 522).Background Ruth Heffron established an IRA naming her daughter, Heidi Heffron-Clark, as the sole beneficiary. Ruth died in 2001 and the account, valued at roughly $300,000, passed to Heidi.

On June 12, 2014, the Supreme Court issued a unanimous opinion in Clark v. Rameker, Dkt. No. 13-299, 573 U.S. ___ (2014), holding that funds held in inherited Individual Retirement Accounts are not “retirement funds” within the meaning of 11 U.S.C. § 522(b)(3)(c) and therefore not exempt from the bankruptcy estate. This opinion limits retirement funds that remain out of creditors’ reach when an individual files a bankruptcy case.

Wisconsin is not an opt out state, permitting debtors to elect to use either the Wisconsin exemptions or the Federal exemptions. Heidi elected to use Wisconsin exemptions and claimed that the inherited IRA was an exempt asset under the Wisconsin exemptions and under 11 U.S.C. § 522(b)(3)(C), the Federal exemption applicable when state exemptions are applicable.The Seventh Circuit recognized that the term “retirement funds”, although used in § 522(b)(3)(C) and (d)(12) of the Bankruptcy Code for state exemptions and Federal exemptions respectively, was not defined in the Bankruptcy Code.

[8] But after further review, they decided that allowing the debtor to opt into the federal exemptions was the more prudent decision because of the adjustable nature of the federal homestead exemption.[9] Although Rep. Farmer asserts that the purpose of the Bill was primarily to allow Kentucky debtors to capitalize on the adjustable federal homestead exemption,[10]debtors are also able to utilize any other exemptions in 11 U.S.C. § 522(d).[11]In summary, by requiring a 730 day residence, the amendments to the Bankruptcy Code now make it much harder for an individual to qualify for a certain state’s exemption statutes.

In its opinion, the district court largely upheld orders by the U.S. Bankruptcy Court of the Virgin Islands holding both Prosser and his wife, Dawn, in contempt for allowing the dissipation and destruction of the wine collection, but reversed an order of the bankruptcy court that would have empowered the trustee to sell real property held by the Prossers to satisfy a $528,086 monetary sanction that would reimburse the trustee for his expenses in prosecuting the contempt action. The property in question, held by the Prossers as tenants by the entireties (the “TBE Property”), had previously been adjudicated as exempt under 11 U.S.C. §522(b)(3)(B). The district court held that a sanction intended to reimburse the estate for attorney’s fees and expenses constituted an administrative expense and was barred by 11 U.S.C. §522(k).

On June 12, 2014, the U.S. Supreme Court issued its opinion in Clark v. Rameker[1], opening up another source of recovery for creditors and Chapter 7 trustees in bankruptcy proceedings.In Clark, a Chapter 7 debtor inherited an IRA from her mother nearly 10 years before filing bankruptcy with her husband.Upon filing the bankruptcy petition, she claimed the inherited IRA as exempt under 11 U.S.C. § 522(b)(3)(C).[2] The Bankruptcy Court disallowed the exemption on the grounds that an inherited IRA, unlike a debtor’s own IRA, was not meant to provide for the retirement of the debtor.

Prior to the Debtor filing her bankruptcy case, her stepmother passed away, leaving an inherited IRA naming the Debtor as the beneficiary. In her amended schedules, the Debtor listed the inherited IRA, claiming it as fully exempt under 11 U.S.C. §522(d)(12), but also claiming the inherited IRA was not property of the estate.[2] The Chapter 7 Trustee objected to the exemption and requested the inherited IRA be deemed property of the bankruptcy estate.

Following the owner's death, the beneficiaries have some options with regard to the distribution of the balance of the inherited IRA, if the owner has not directed otherwise; these include (i)taking a lump-sum payment, which may result in a large income tax liability; (ii)taking the required minimum distributions, based on the beneficiary's life expectancy; or (iii)if the owner's spouse is the named beneficiary, treating the inherited IRA as his or her own, thus deferring or extending the required minimum distributions, assuming that the spouse's age allows for this.Clark v. Rameker Decision In Clark, the Supreme Court considered whether an inherited IRA is subject to creditors' claims asserted in an IRA beneficiary's bankruptcy proceeding, or whether an inherited IRA is protected as a retirement fund. The bankruptcy exemption provided by 11 U.S.C. §522(b)(3)(C) is intended to allow debtors to protect certain IRA funds needed to meet their basic retirement needs. The Supreme Court identified three characteristics of an inherited IRA that establish an inherited IRA is not objectively set aside for retirement purposes: (i)additional money can never be invested into the inherited IRA account by the named beneficiary; (ii)withdrawals can be taken from the account regardless of the beneficiary's proximity to retirement; and (iii)the entire balance can be withdrawn for any purpose and without penalty by the beneficiary.