The argument in favor of such a trend was that the bankruptcy code protects “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under Sections 401, 403, 408, 408A, 414, 457 or 501(a) of the Internal Revenue Code.”
However, recent bankruptcy court rulings show a growing trend toward questioning whether an inherited retirement account still qualifies for protection under this section. In essence, the argument lies in the question as to why inherited non-retirement assets are protected, yet inherited retirement assets are, especially when such assets may no longer qualify as “retirement funds” in the hands of the inheriting beneficiary (if a narrow reading was made of “retirement funds” within the bankruptcy code).
With such dissonance growing among various bankruptcy court opinions and rulings across the nation, the Supreme Court will hear the matter. The Supreme Court granted a petition for a writ of certiorari on November 26, 2013 in the matter of Clark v. Rameker 714 F.3d 559 (7th Cir. 2013).The issue is whether an inherited retirement account is protected in a bankruptcy proceeding. Oral arguments are expected to begin in late March 2014.
If the Supreme Court rules that no protection should be afforded an inherited retirement fund in a bankruptcy proceeding, there may be some additional estate planning that many Americans will find suitable to ensure the protection of these inherited retirement funds for their beneficiaries upon passing.
To learn more about what you can do to ensure your beneficiaries inherit your retirement funds in a creditor-protected manner, click here.
To learn more about the underlying case the Supreme Court will decide upon, click here.