Get out of the closet and tell the world you're a life insurance agent!
By Cyril Tuohy
Bankrupt investors lucky enough to benefit from nonspousal inherited individual retirement accounts (IRAs) are better off living in some states.
Alaska, Arizona, Florida, Missouri, North Carolina, Ohio and Texas are the only states where nonspousal inherited IRAs are safe from trustees seeking assets in the settlement of bankruptcy cases, said Seymour Goldberg, senior partner and IRA trustee expert with Goldberg & Goldberg in Woodbury, N.Y.
“If you live in states with an exemption, you would be protected,” Goldberg told InsuranceNewsNet.
Financial advisors with clients involved in disputes involving nonspousal inherited IRAs had better choose lawyers carefully. Choosing whether to pursue litigation in state or federal courts, depending on where a client lives, can make all the difference.
“This is the lawyer’s game now,” Goldberg said.
It is the first time Goldberg, who filed a friend-of-the-court brief on behalf of bankruptcy trustee William J. Rameker, has commented on the case since the decision was handed down June 12.
In Clark v. Rameker, the U.S. Supreme Court ruled 9-0 that nonspousal inherited IRAs were not exempt from a debtor’s estate in bankruptcy. The decision left the door open for creditors to claim IRA assets inherited from a family member other than a spouse.
“I thought it was going to be a closer call,” said Goldberg, author of the forthcoming book Can You Trust Your Trust? scheduled for publication next month by the American Bar Association. “They went by the book and not by sympathy.”
In comments to the Wisconsin State Journal, Rameker, an attorney with Murphy Desmond in Wisconsin, said “I am pleased the U.S. Supreme Court clarified the laws on the status of a non-spousal inherited IRA held by a parson who has declared bankruptcy.”
Williams & Connolly partner Kannon Shanmugam, who argued on behalf of Brandon C. Clark, declined to comment on the implications of the decision on future cases.
Even through Clark v. Rameker dealt with a traditional IRA only, legal experts said the Supreme Court’s decision pertains to all IRAs: Roth IRA, SEP-IRAs, SAR-SEP IRAs and Simple IRAs.
“In this case, the inherited IRA was a traditional IRA, but there’s no difference between a traditional IRA or a Roth IRA,” Wilmer Cutler Pickering Hale and Dorr partner Danielle Spinelli told InsuranceNewsNet. “They would be treated the same way under the court’s logic.”
Spinelli, who argued the case before the court on behalf of Rameker, said the case only affects IRAs that belong to nonspousal beneficiaries of the decedent.
The court’s decision has the most immediate impact on consumer debtors and on financial advisors who recommend IRAs as estate planning tools, Spinelli also said.
Lawyers involved in bankruptcy trustee proceedings have to decide whether to proceed under a state or a federal exemption, she added.
“There are some states that do protect inherited IRAs so the fact that they are not protected under the federal exemption doesn't mean that states can't create their own,” Spinelli said. “States can create their own (exemptions) if there is a reason to.”
The case began in 2001, when Heidi Heffron-Clark inherited a $450,000 traditional IRA from the estate of her mother Ruth Heffron. Heffron, who died in 2001, had named her daughter the sole beneficiary of the account the year before.
But when Heffron-Clark and her husband filed for Chapter 7 bankruptcy in 2010, the couple claimed the IRA was exempt from claims of the creditors and the bankruptcy trustee.
Rameker objected on the grounds that the IRA was not a retirement fund in the context of bankruptcy laws. The Bankruptcy Court agreed.
A U.S. District Court overturned the Bankruptcy Court decision, but the 7th U.S. Circuit Court of Appeals agreed with the Bankruptcy Court and the case ended up before the Supreme Court.
IRAs held assets worth $6.5 trillion at the end of last year, according to the Investment Company Institute.
Estimating that nonspousal inherited IRAs make up 1 percent of total IRA wealth, as much as $54 billion in IRA assets previously inaccessible to creditors is now no longer protected, Eleanor Blayney, the Board of Certified Financial Professionals’ consumer advocate, wrote in a recent blog posting.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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