ILNews

SCOTUS adds IRA dispute in effort to avoid future chaos

Back to TopCommentsE-mailPrint
Indiana Lawyer Focus

In agreeing to hear an appeal on the question of whether retirement funds remain retirement funds after they are inherited, the Supreme Court of the United States seems to be acknowledging that what is today a rare question could arise more often as the population ages and more parents leave money to their children.

The case, Clark v. Rameker, 13-299, came from the 7th Circuit Court of Appeals and concerns an Individual Retirement Account passed down to a daughter who subsequently filed for bankruptcy. Judge Frank Easterbrook, writing for the court, held that when the IRA was inherited by someone other than the owner’s spouse, it was no longer exempt from creditors’ claims.

This decision, handed down in April 2013, is contrary to a March 2012 ruling by the 5th Circuit Court of Appeals and opened a split within the Circuit courts.

dible-jeffrey-mug Dible

While a split alone is not always enough to entice the Supreme Court to wade into a dispute, some attorneys speculate that the justices added this case to the current docket because they want to clarify the law now, rather than let chaos prevail if the issue of exemption increasingly comes up as the baby boomers leave behind assets.

John Carr, of counsel at Ayres Carr & Sullivan P.C., described the question surrounding inherited IRAs as an emerging issue. He’s not surprised it caught the attention of the U.S. Supreme Court.

“This is a significant issue concerning the debtor’s right to an exemption or right to a fresh start versus receiving a windfall at the expense of the creditors,” Carr said. “Are they getting a fresh start or a head start?”

Public policy has been designed to reward individuals who save for retirement by keeping those accounts beyond creditors’ reach. Any time IRA owners get into financial difficulties, their assets intended for financial support in retirement will be protected.

Courts have had to decide a handful of times whether that protection continues when a non-spouse inherits the IRA. The cases that have popped up in U.S. Bankruptcy and District courts have focused on Section 522 of the U.S. Bankruptcy Code. This federal provision provides an exemption for IRA owners and trumps all state bankruptcy codes.

The decision for In re Chilton, 674 F.3d 486 (5th Cir. 2012), was the first time the question reached a federal court of appeals. Using the plain-meaning doctrine that Congress said exactly what it meant, the court held that an IRA passed along after the death of the owner still met the main characteristic in that the money was “set apart” for retirement. Consequently, the funds remained exempt from any bankruptcy proceeding.

Easterbrook was clear that the 7th Circuit disagreed with that analysis. The Chicago-based court used the rational-basis test and found that there is some ambiguity in what constitutes a retirement fund. In considering the Clark case, the 7th Circuit held that even though the inherited IRA continued to be sheltered from taxes until the money was withdrawn, the account had lost other key attributes.

Namely, the beneficiary could not contribute to the IRA nor roll it over into any other account. Also, the beneficiary was not allowed to hold the funds until her own retirement but had to begin making withdrawals within a year of the owner’s death.

The dispute before the 7th Circuit centered on Heidi Heffron-Clark and the IRA worth about $300,000 she inherited after her mother, Ruth Heffron, died in 2001. When the pizza parlor owned by Clark and her husband, Brandon, failed in 2010, the couple filed for Chapter 7 bankruptcy but claimed the inherited IRA was still a retirement fund and, therefore, was exempt from creditors under Section 522.

Robert Martin, chief judge of the U.S. Bankruptcy Court for the Western District of Wisconsin, ruled the exemption did not apply to inherited IRAs, but the U.S. District Court for the Western District of Wisconsin reversed.

Easterbrook stated the bankruptcy judge got the decision right. The 7th Circuit held the problem with taking the 5th Circuit’s view that an inherited IRA is exempt in bankruptcy is that it keeps from creditors a pool of money that the debtor could freely use at any time.

To underscore his ruling, Easterbrook offered the scenario of Ruth Heffron withdrawing funds from the IRA prior to her death and giving them as a gift to her daughter. Once in Heidi Heffron-Clark’s bank account, the money would be no different from any other assets she had and would be within creditors’ reach.

“Why should it make a difference whether the money passed to Heidi on Ruth’s death or a little earlier,” Easterbrook asked. “Either way, the money used to be ‘retirement funds’ but isn’t now.”

motsinger-dan-mug Motsinger

Dan Motsinger, partner and chair of the creditors’ rights and bankruptcy practice group at Krieg DeVault LLP, was struck by Easterbrook’s reasoning, comparing it to that of a mathematician. The decision is logical in a mathematical sense, Motsinger said, with the way Easterbrook views the bankruptcy code within the context of the tax statute.

“This opinion is very strongly worded,” Motsinger said. “There is no waffling at all in this opinion.”

At the Supreme Court, the Clarks could have a tougher time trying to convince the justices that the 7th Circuit was wrong. Motsinger said the presumption that the Supreme Court will affirm the 7th Circuit is not “wild speculation” given the reputation the 7th Circuit has as being a court that “doesn’t shoot from the hip,” coupled with the high regard in which both Easterbrook and Martin are held.

The U.S. Supreme Court’s ruling in Hamilton v. Lanning, 560 U.S. (2010), also gives Carr, with nearly 40 years of practice in bankruptcy law, reason to believe the 7th Circuit’s decision will be upheld.

Prior to the 2005 bankruptcy reform, the Supreme Court seemed to lean toward the plain-meaning doctrine. But after the reform, the court shifted, as Hamilton v. Lanning demonstrates, to doing what the 7th Circuit did by looking at what Congress intended.

The impact of having the 7th Circuit affirmed would fuel renewed emphasis on estate planning to try to prevent children with financial troubles from losing their inheritance.

Jeff Dible, an attorney at Frost Brown Todd LLC who concentrates his practice on estate planning, taxation and general business law, sees the potential for an increase in qualified disclaimers and spendthrift trusts should the Supreme Court agree with the 7th Circuit. Both would provide ways for the inherited IRA to be used for the benefactor’s wellbeing rather than going to creditors.

With a qualified disclaimer, a benefactor who owes money could turn down the inheritance, sending the funds either back to the estate or to a secondary benefactor. Through a spendthrift trust, the inherited retirement funds would be administered by the trustee who could guard against the benefactor’s worst impulses by making payments directly to the third party.

Not seeing how the Circuit courts could have healed the split on their own, Dible asserted the U.S. Supreme Court was right to tackle the question about inherited IRAs. As it stands, the division between the Circuits could spur some debtors to forum shop and file their petitions in the court most likely to rule in their favor.•

ADVERTISEMENT

Post a comment to this story

COMMENTS POLICY
We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
 
You are legally responsible for what you post and your anonymity is not guaranteed.
 
Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in Indiana Lawyer editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
 
No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
 
We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.
 

Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

Sponsored by

facebook - twitter on Facebook & Twitter

Indiana State Bar Association

Indianapolis Bar Association

Evansville Bar Association

Allen County Bar Association

Indiana Lawyer on Facebook

facebook
ADVERTISEMENT
Subscribe to Indiana Lawyer
  1. Am I the only one who sees that the City is essentially giving away the MSA site AND giving millions to build new buildings on the site when this site would be the perfect place for the Justice Complex? Across from City-County, check; keeping it centrally located, check, etc. It's my understanding that the GM site must be purchased by the City from Motors Liquidation Company. STOP WASTING WHAT WE ALREADY HAVE AND OUR TAX DOLLARS! The Ballard Administration has not been known for it's common sense...never voted for him and never will!

  2. This guy sounds like the classic molester/manipulator.

  3. Louis D. Brandeis was born in 1856. At 9 years of age it would have been 1865. The Brandeis family did not own slaves. My source Louis D. Brandeis: A Life, by Melvin L. Urofsky.

  4. My name is Matthew Lucas Major, I recently went through a jury trial in Bloomington , In. It was the week of Feb 19-21. Although I have been incarcerated since August 5, 2014. The reason I 'am writing to you sir is on the 21 of February the jury came in with a very excessive and wrongful verdict of guilty on 6 child molesting charges against my daughter who was 9 at the time I was accused. I also had 2 other Felonies one of Intimidation and 1 of Sexual Vicarious Gratification. Judge Marc Kellam on the second day of trial gave me a not guilty on those 2 felonies. The jury was sent out during that time and when brought back Judge Kellam told them to not concern themselves with the 2 Felonies that he ruled on them. They were told to not let evidence they had already heard influence there verdicts. I never in my life touched any child sexually and definitely not with my own daughter. When I was arrested Detective Shawn Karr told me I would be convicted guilty just on my daughters word even without evidence. That's just what happened. my public defender did me so wrong he never once proved to the court and jury all the lies the child told, and Jeremy Noel my public defender could of proven the lies easily. The stories in Serenity's depositions and Forensic interview changed and were not consistent as Prosecutor Darcie Fawcett claimed they were. Yet my attorney never mentioned that. The facts that the child accused me of full penetration in her vagina and rectum was proven lies. Doctor Roberta Hibbard of Riley hospital in Indianapolis confirmed Serenity's hymen intact, no scars, no tearing, no signs of rape to her. Yet my attorney didn't use that knowledge . the DNA was all in my favor. I tell you I will spend my entire life in prison going through rape and beatings etc. even Judge Kellam abused his authority by telling the jurors to listen and believe what the prosecutors side in evidence like my daughters testimony. In one interview with the detectives my daughter got flustered with her mom and said on camera " I'm saying what you told me to mom"!! Yet Mr. Noel said nor did anything to even resemble a defense attorney. Judge Kellam allowed edited version of a taped conversation between the child and her mother. Also Judge Kellam allowed the Prosecutor too bring in to my case a knife found under my seat, the knife wasn't part of my case. She was allowed by my attorney and the judge to put a huge picture of it on the screen and huge picture of my naked privates in a full courtroom and open court. Ms. Fawcett says to jury see how easy Mr. Major could reach the knife and cut his Childs throat. Even though I had no weapons charge against these cases. This gave the jurors prejudice thought against me thinking I threatened her with that knife and how scared she would of been knowing i could get it and kill her. On my sentencing court March 19, 2014 my public defender told Judge Kellam he wish to resign from being my attorney and wished for the court to give me outside council to file a error to trial or appeal. We were denied. Now after openly knowing my public defender don't want to represent me he has to. Well when as parents we make our kids clean a room when they really don't wish to, well the child will but don't mean she will do a good job, that's where I'm at with Mr. Noel. please dont ignore mine and my families pleas for your help . we have all the legal proof you could need to prove Im innocent. Please dont make my spend years in prison innocent when you can fix this wrong. Im not saying Im a perfect man or that I was a perfect dad to my 2 children none of us are. Ive made some bad choices in life and I paid for them. But I didnt ever touch or rape my daughter . I love my children with all my heart. And now through needing attention and a ex-wife who told my granny several times she wish she could put me in prison to get me out of their lives. Well my ex finally accomplished her goal. Sad part is she is destroying our daughter with all this horrific lies and things she taught my daughter to say. My daughter will need therapist to ever hope for a chance of a normal life after what she had done to her by her mom and their side of the family. My daughter told everyone even on stand she had a dream months before i supposedly molested her in this dream I was molesting her and when I finally did it matched her dream perfectly. She admitted to watching movies about little girls being molested and watching U-Tube videos about child molesting all before it happened supposedly to her. Doesn't that sound very unusual that a non molested 9 yr old would need to know so much about being molested? The only reason I could think a 9 year old would need so much information is to be prepared to know what to say and be able to say how it felt what took place etc.. So when questioned by authorities she would be prepared. And there again sir if a parent is pre grooming a 9 year old child she would need intimate details . Like telling her daughter about a couple moles on my private area. The child admitted to sneaking my cell and looking many many times at nudes of me and my girlfriend even one where my penis was entering my girlfriends vagina. In that picture my moles are obvious. Yet when prosecutor showed everyone in court my privates and pictures of the moles she said the only way the child would know about them is if she saw them for herself. My attorney once again said nothing about the pictures my child saw. Or could a ex-wife be able to describe my moles to help her case against getting rid of me? I beg you help me. This is my very existence. Ive lost everything , a good job, a wonderful girlfriend, my freedom, but worse thing Ive lost is my children. They were my reason to get up every morning and strive to be better. The wonderful bond I had with my Serenity is gone. After this I would be afraid to even hug her for fear of what next can they do to me. I'm not afraid to tell you I sit here in this cell and try to hold back my tears. Everyone knows you cant show weakness in prison. My life has already been threatened here at Wabash Valley Prison. After only 3 days of arrival. I was tricked into signing a waiver now Im in G Block General Population with 6 child molesting felony charges. Mrs. Hart as a 18 year old I almost died hooked to machines in hospital almost 1 month and now I know that fear was childish compared to this . I cant help but put emotions in this, after all Mrs. Hart Im human and God help Me I never been more afraid in my life. I didnt hurt my little girl I didnt touch her sexually. As much as it shreds me and fills my mind what Im facing I worry more about my mom and granny because of their great love for me mam they are suffering so deeply. I aint done this things but my loved ones suffering right along beside me and If you take my case you will be in essence freeing them also. I sent momma this letter and asked her to email it to you. I'm scared I have been done so unjustly by our legal system and I need you to fix this and give me freedom. I ask you please don't just ignore my pleas. Here in America its nice to be able to trust our legal justice system, well they destroyed my and my loved ones trust in our justice system . And I'm trusting in You !!! My entire family is suffering this nightmare with me. My 77 year old granny had a stroke and isn't doing so well. My single mother that raised 3 kids alone is dying from Lupus and since my arrest has stayed so sick and weary. Our lives torn to peices by a government I was taught I could trust in. my momma has tried so many innocent project and wrongfully accused and cant get anywhere. please please help me. A quote from the late Nelson Mandela: To be free is not merely to cast off ones chains, But to live in a way that respects and enhances The Freedom Of Others. I have Faith in you and your clinic to cast my chains off and give me freedom I do deserve as a wrongfully accused Man, son, brother, father, friend. Matthew Major DOC# 246179 Cause # : 53c02-1308-FA-000779 God Bless you. Please contact me with your decision so I know you made a life changing decision for me , just please at least write me so I know you care enough about your citizens to respond to cries for your help. You can speak openly with my mother Charlotte Spain (828) 476-0406: 71 Lakeview Dr. Canton, NC 28716 Thank You Matthew Major I know yall get thousands of request and inmates claiming innocence, and each person who are innocent deserve to have organizations like yours willing to fight for them and I give yall so much Thanks and I thank God everyday yall are out there caring enough to help free the innocents. Since discovering firsthand how easily lives and families can be destroyed by Poor Defense attorneys not doing their job . And Prosecutors allowed to do as they please in court

  5. Frankly, it is tragic that you are even considering going to an expensive, unaccredited "law school." It is extremely difficult to get a job with a degree from a real school. If you are going to make the investment of time, money, and tears into law school, it should not be to a place that won't actually enable you to practice law when you graduate.

ADVERTISEMENT