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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. Good luck, but as I have documented in three Hail Mary's to the SCOTUS, two applications (2007 & 2013),a civil rights suit and my own kicked-to-the-curb prayer for mandamus. all supported in detailed affidavits with full legal briefing (never considered), the ISC knows that the BLE operates "above the law" (i.e. unconstitutionally) and does not give a damn. In fact, that is how it was designed to control the lawyers. IU Law Prof. Patrick Baude blew the whistle while he was Ind Bar Examiner President back in 1993, even he was shut down. It is a masonic system that blackballs those whom the elite disdain. Here is the basic thrust:https://en.wikipedia.org/wiki/Blackballing When I asked why I was initially denied, the court's foremost jester wrote back that the ten examiners all voted, and I did not gain the needed votes for approval (whatever that is, probably ten) and thus I was not in .. nothing written, no explanation, just go away or appeal ... and if you appeal and disagree with their system .. proof positive you lack character and fitness. It is both arbitrary and capricious by its very design. The Hoosier legal elites are monarchical minded, and rejected me for life for ostensibly failing to sufficiently respect man's law (due to my stated regard for God's law -- which they questioned me on, after remanding me for a psych eval for holding such Higher Law beliefs) while breaking their own rules, breaking federal statutory law, and violating federal and state constitutions and ancient due process standards .. all well documented as they "processed me" over many years.... yes years ... they have few standards that they will not bulldoze to get to the end desired. And the ISC knows this, and they keep it in play. So sad, And the fed courts refuse to do anything, and so the blackballing show goes on ... it is the Indy way. My final experience here: https://www.scribd.com/document/299040062/Brown-ind-Bar-memo-Pet-cert I will open my files to anyone interested in seeing justice dawn over Indy. My cases are an open book, just ask.

  2. Looks like 2017 will be another notable year for these cases. I have a Grandson involved in a CHINS case that should never have been. He and the whole family are being held hostage by CPS and the 'current mood' of the CPS caseworker. If the parents disagree with a decision, they are penalized. I, along with other were posting on Jasper County Online News, but all were quickly warned to remove posts. I totally understand that some children need these services, but in this case, it was mistakes, covered by coorcement of father to sign papers, lies and cover-ups. The most astonishing thing was within 2 weeks of this child being placed with CPS, a private adoption agency was asking questions regarding child's family in the area. I believe a photo that was taken by CPS manager at the very onset during the CHINS co-ocerment and the intent was to make money. I have even been warned not to post or speak to anyone regarding this case. Parents have completed all requirements, met foster parents, get visitation 2 days a week, and still the next court date is all the way out till May 1, which gives them(CPS) plenty of to time make further demands (which I expect) No trust of these 'seasoned' case managers, as I have already learned too much about their dirty little tricks. If they discover that I have posted here, I expect they will not be happy and penalized parents again. Still a Hostage.

  3. They say it was a court error, however they fail to mention A.R. was on the run from the law and was hiding. Thus why she didn't receive anything from her public defender. Step mom is filing again for adoption of the two boys she has raised. A.R. is a criminal with a serious heroin addiction. She filed this appeal MORE than 30 days after the final decision was made from prison. Report all the facts not just some.

  4. Hysteria? Really Ben? Tell the young lady reported on in the link below that worrying about the sexualizing of our children is mere hysteria. Such thinking is common in the Royal Order of Jesters and other running sex vacays in Thailand or Brazil ... like Indy's Jared Fogle. Those tempted to call such concerns mere histronics need to think on this: http://www.msn.com/en-us/news/us/a-12-year-old-girl-live-streamed-her-suicide-it-took-two-weeks-for-facebook-to-take-the-video-down/ar-AAlT8ka?li=AA4ZnC&ocid=spartanntp

  5. This is happening so much. Even in 2016.2017. I hope the father sue for civil rights violation. I hope he sue as more are doing and even without a lawyer as pro-se, he got a good one here. God bless him.

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