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SCOTUS adds IRA dispute in effort to avoid future chaos

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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.•

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  1. I have been on this program while on parole from 2011-2013. No person should be forced mentally to share private details of their personal life with total strangers. Also giving permission for a mental therapist to report to your parole agent that your not participating in group therapy because you don't have the financial mean to be in the group therapy. I was personally singled out and sent back three times for not having money and also sent back within the six month when you aren't to be sent according to state law. I will work to het this INSOMM's removed from this state. I also had twelve or thirteen parole agents with a fifteen month period. Thanks for your time.

  2. Our nation produces very few jurists of the caliber of Justice DOUGLAS and his peers these days. Here is that great civil libertarian, who recognized government as both a blessing and, when corrupted by ideological interests, a curse: "Once the investigator has only the conscience of government as a guide, the conscience can become ‘ravenous,’ as Cromwell, bent on destroying Thomas More, said in Bolt, A Man For All Seasons (1960), p. 120. The First Amendment mirrors many episodes where men, harried and harassed by government, sought refuge in their conscience, as these lines of Thomas More show: ‘MORE: And when we stand before God, and you are sent to Paradise for doing according to your conscience, *575 and I am damned for not doing according to mine, will you come with me, for fellowship? ‘CRANMER: So those of us whose names are there are damned, Sir Thomas? ‘MORE: I don't know, Your Grace. I have no window to look into another man's conscience. I condemn no one. ‘CRANMER: Then the matter is capable of question? ‘MORE: Certainly. ‘CRANMER: But that you owe obedience to your King is not capable of question. So weigh a doubt against a certainty—and sign. ‘MORE: Some men think the Earth is round, others think it flat; it is a matter capable of question. But if it is flat, will the King's command make it round? And if it is round, will the King's command flatten it? No, I will not sign.’ Id., pp. 132—133. DOUGLAS THEN WROTE: Where government is the Big Brother,11 privacy gives way to surveillance. **909 But our commitment is otherwise. *576 By the First Amendment we have staked our security on freedom to promote a multiplicity of ideas, to associate at will with kindred spirits, and to defy governmental intrusion into these precincts" Gibson v. Florida Legislative Investigation Comm., 372 U.S. 539, 574-76, 83 S. Ct. 889, 908-09, 9 L. Ed. 2d 929 (1963) Mr. Justice DOUGLAS, concurring. I write: Happy Memorial Day to all -- God please bless our fallen who lived and died to preserve constitutional governance in our wonderful series of Republics. And God open the eyes of those government officials who denounce the constitutions of these Republics by arbitrary actions arising out capricious motives.

  3. From back in the day before secularism got a stranglehold on Hoosier jurists comes this great excerpt via Indiana federal court judge Allan Sharp, dedicated to those many Indiana government attorneys (with whom I have dealt) who count the law as a mere tool, an optional tool that is not to be used when political correctness compels a more acceptable result than merely following the path that the law directs: ALLEN SHARP, District Judge. I. In a scene following a visit by Henry VIII to the home of Sir Thomas More, playwriter Robert Bolt puts the following words into the mouths of his characters: Margaret: Father, that man's bad. MORE: There is no law against that. ROPER: There is! God's law! MORE: Then God can arrest him. ROPER: Sophistication upon sophistication! MORE: No, sheer simplicity. The law, Roper, the law. I know what's legal not what's right. And I'll stick to what's legal. ROPER: Then you set man's law above God's! MORE: No, far below; but let me draw your attention to a fact I'm not God. The currents and eddies of right and wrong, which you find such plain sailing, I can't navigate. I'm no voyager. But in the thickets of law, oh, there I'm a forester. I doubt if there's a man alive who could follow me there, thank God... ALICE: (Exasperated, pointing after Rich) While you talk, he's gone! MORE: And go he should, if he was the Devil himself, until he broke the law! ROPER: So now you'd give the Devil benefit of law! MORE: Yes. What would you do? Cut a great road through the law to get after the Devil? ROPER: I'd cut down every law in England to do that! MORE: (Roused and excited) Oh? (Advances on Roper) And when the last law was down, and the Devil turned round on you where would you hide, Roper, the laws being flat? (He leaves *1257 him) This country's planted thick with laws from coast to coast man's laws, not God's and if you cut them down and you're just the man to do it d'you really think you would stand upright in the winds that would blow then? (Quietly) Yes, I'd give the Devil benefit of law, for my own safety's sake. ROPER: I have long suspected this; this is the golden calf; the law's your god. MORE: (Wearily) Oh, Roper, you're a fool, God's my god... (Rather bitterly) But I find him rather too (Very bitterly) subtle... I don't know where he is nor what he wants. ROPER: My God wants service, to the end and unremitting; nothing else! MORE: (Dryly) Are you sure that's God! He sounds like Moloch. But indeed it may be God And whoever hunts for me, Roper, God or Devil, will find me hiding in the thickets of the law! And I'll hide my daughter with me! Not hoist her up the mainmast of your seagoing principles! They put about too nimbly! (Exit More. They all look after him). Pgs. 65-67, A MAN FOR ALL SEASONS A Play in Two Acts, Robert Bolt, Random House, New York, 1960. Linley E. Pearson, Atty. Gen. of Indiana, Indianapolis, for defendants. Childs v. Duckworth, 509 F. Supp. 1254, 1256 (N.D. Ind. 1981) aff'd, 705 F.2d 915 (7th Cir. 1983)

  4. "Meanwhile small- and mid-size firms are getting squeezed and likely will not survive unless they become a boutique firm." I've been a business attorney in small, and now mid-size firm for over 30 years, and for over 30 years legal consultants have been preaching this exact same mantra of impending doom for small and mid-sized firms -- verbatim. This claim apparently helps them gin up merger opportunities from smaller firms who become convinced that they need to become larger overnight. The claim that large corporations are interested in cost-saving and efficiency has likewise been preached for decades, and is likewise bunk. If large corporations had any real interest in saving money they wouldn't use large law firms whose rates are substantially higher than those of high-quality mid-sized firms.

  5. The family is the foundation of all human government. That is the Grand Design. Modern governments throw off this Design and make bureaucratic war against the family, as does Hollywood and cultural elitists such as third wave feminists. Since WWII we have been on a ship of fools that way, with both the elite and government and their social engineering hacks relentlessly attacking the very foundation of social order. And their success? See it in the streets of Fergusson, on the food stamp doles (mostly broken families)and in the above article. Reject the Grand Design for true social function, enter the Glorious State to manage social dysfunction. Our Brave New World will be a prison camp, and we will welcome it as the only way to manage given the anarchy without it.

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