Inherited IRAs in Florida after the Supreme Court’s Decision in Clark
On June 12, 2014, in the case of Clark v. Rameker (In re Clark),1 the Supreme Court ruled that inherited individual retirement accounts were not protected from the reach of an individual’s creditors under bankruptcy law.2
In Clark, the debtor in bankruptcy claimed an IRA that she inherited from her mother as exempt – meaning that she gets to keep the asset in bankruptcy and that the funds are not taken by the Trustee to administer to all creditors.3 The Chapter 7 Trustee in Clark objected. The Wisconsin bankruptcy court ruled that the inherited IRA was NOT exempt (i.e. not exempt from the reach of creditors).4 The District Court disagreed with the bankruptcy court.5 The Trustee appealed that decision to the Seventh Circuit which, in turn, reversed the District Court’s decision and agreed with the bankruptcy court.6 The case made it to the Supreme Court which agreed, or affirmed, the Seventh Circuit.7
As explained by the Supreme Court, an “inherited IRA” was not like a retirement account. The only option for a non-spouse beneficiary is to treat the account as an “inherited IRA” under the IRS rules and regulation. A non-spouse beneficiary who inherits an IRA is not eligible to “roll over” the IRA funds into his or own IRA (in contrast, a spouse inheriting an IRA may rollover the account into his or her own account). The beneficiary is never allowed to make any contributions to that inherited IRA account. Instead, the beneficiary must withdraw the all funds within five years or take minimum distributions over time. Further, under the IRS rules, an inherited IRA can be withdrawn by the beneficiary at any time without penalty.8 The Supreme Court9 found that these attributes were sufficient to make inherited IRAs fall outside the definition of “retirement funds” under the Bankruptcy Code10 and were, therefore, subject to the claims of creditors.
Of course, Clark left for another day the issue of whether an inherited IRA by a spouse would always be exempt as “retirement funds” under the bankruptcy laws.11 If an inheriting spouse rolled over the IRA into his or her own account, clearly those funds would most likely be exempt under Clark. However, what happens if the inheriting spouse decided against the rollover option and opted instead to treat the account as an “inherited IRA”? Would that election by a spouse be sufficient to make that IRA non-exempt under Clark? That answer depends on the applicable state law. A debtor’s exemptions in bankruptcy depend on which state law is applicable. Florida is an “opt out” state,12 meaning that Florida’s legislature limits its residents in bankruptcy from only claiming state law exemptions.13
Prior to the Supreme Court’s decision in Clark, the courts in Florida were also split as to whether inherited IRAs were exempt.14 The Florida legislature disagreed with the holdings of those courts that specifically ruled that inherited IRAs were not exempt from the reach of creditors under Florida statute15. Accordingly, in 201116, the legislature amended the Florida statute to make it clear that inherited IRAs were exempt.17 This amended statute is too new to generate any reported cases so far. However, because Florida has such a clear statute on the exemption of inherited IRAs, Florida residents (whether as a spouse or non-spouse) claiming the Florida exemptions need not worry about the Clark decision.18
1 134 S.Ct 2242, 2245 (2014).
2 The Supreme Court held that “retirement funds” as that term is used in the Bankruptcy Code, 11 U.S.C. § 522(b)(3)(C). Section 522(b)(3)(C) allows a debtor in bankruptcy to protect “retirement funds to the extent those funds are in a fund or account that is exempt from taxation under section 401,403,408, 408A, 414, 457 or 510(A) of the Internal Revenue Code.”
3 Her claimed exemption was made under 11 U.S.C. § 522(b)(3)(C).
4 In re Clark, 450 B.R. 858, 866 (Bankr. W.D. Wisc. 2011).
5 In re Clark, 466 B.R. 135, 139 (W.D. Wisc. 2012).
6 In re Clark, , 714 F.3d 559 (2013).
7 This Clark case abrogated the Fifth Circuit’s decision in In re Chilton, 674 F.3d 486 (5th Cir. 2012) which, in contrast to the Seventh Circuit, held that inherited IRAs were “retirement funds” and exempt under 11 U.S.C. § 522(b)(3)(C).
8 Clark, 134 S.Ct. at 2245-47.
9 Clark, 134 S.Ct. at 2247.
10 As set forth in 11 U.S.C. § 522(b)(3)(C).
11 As defined under 11 U.S.C. § 522(b)(3)(C).
12 Pursuant to 11 U.S.C. § 522(b)(2).
13 Fla. Stat. § 222.20.
14 The Florida state court in Robertson v. Deeb, 16 So.3d 936 (Fla. 2d DCA 2009) relied upon the same rationale of Clark and had ruled that an inherited IRA under Fla. Stat. 222.21(2)(a) was not exempt from a garnishment action. Judge K. Rodney May, a bankruptcy judge from the Bankruptcy Court for the Middle District of Florida, in In re Ard, 435 B.R. 719, 721 (Bankr. M.D. Fla. 2010), found Robertson persuasive. Thus, he also held that inherited IRAs were not exempt. He sustained the Chapter 7 Trustee’s objection to the Debtor’s inherited IRA from her father, permitting the Trustee to administer the inherited IRA for the benefit of the creditors. Id.
15 § 222.21(c)(2).
16 2011 Fla. Sess. Law Serv. Ch. 2011-84(H.B. 469)(West).
17 § 222.21(c)(2). Fla. Stat. § 221.21(c)(2) currently states:
any money or other assets or any interest in any fund or account that is exempt from claims of creditors of the owner, beneficiary, or participant under paragraph (a) does not cease to be exempt after the owner’s death by reason of a direct transfer or eligible rollover that is excluded from gross income under the Internal Revenue Code of 1986, including, but not limited to, a direct transfer or eligible rollover to an inherited individual retirement account as defined in s. 408(d)(3) of the Internal Revenue Code of 1986, as amended. This paragraph is intended to clarify existing law, is remedial in nature, and shall have retroactive application to all inherited individual retirement accounts without regard to the date an account was created.
18 Note that the residency of the debtor when filing bankruptcy determines which law is applicable under section 522(3)(a). If a Florida resident moves to another state, she or he is precluded from claiming Florida exemptions and thus the Clark holding may be controlling, depending on his or her current state of residency. Alternatively, if a Florida resident dies and his or her IRA is inherited by a relative who resides in another state, the law of that state would apply if that relative were to file bankruptcy. Thus, the Clark decision may be applicable.