Banking Law Bulletin

Recent Developments of Inherited IRAS

What happens after death is often debated, but regardless of one’s ultimate fate, there is no doubt that death affects existing contractual relationships, obligations and assets. In this update, we will look at an important recent development regarding one such asset – inherited IRAs.

As the United States Supreme Court reopens for business this month, Clark vs. Rameker, decided on June 12, 2014, stands out, for creditors and debtors, as one of the Court’s most significant decisions last term.

In Clark, the Supreme Court held that money held in an individual retirement account (IRA), which a daughter inherited from her deceased mother was not “retirement funds” and, as a result, was not exempt from the claims of her creditors. Rather, the funds were part of the daughter’s bankruptcy estate and, thus, available to pay those creditors.

The facts in the case were straight forward: The daughter/debtor filed a chapter 7 bankruptcy case and sought to exclude from her bankruptcy estate, as an exempt asset, $300,000 in an IRA which she had inherited from her deceased mother.

This exemption was challenged by the bankruptcy trustee and, ultimately, the Supreme Court disallowed the exemption on the grounds that the money in the account was no longer exempt “retirement funds” under federal bankruptcy law.

The Court’s rational for its ruling was that the funds, as inherited by the daughter, were no longer being set aside by the current owner for the purpose of retirement and could be withdrawn at any time. Thus, the funds were distinct, in both purpose and restriction, from that originally intended and imposed upon them as a retirement account.

This ruling is important for several reasons, but, before that, some background. First, recall that federal law exempts from bankruptcy “retirement funds” to the extent those funds are in an account that is exempt from taxation under Sections 401, 408 (IRAs) and 408(a) (Roth IRA) of the Internal Revenue Code of 1986, as amended (the “Code”).

Second, in like manner, Illinois law exempts “assets” held in, or the right to receive pensions, annuities, benefits, distributions, refunds or contributions or other payments under a “plan” which is intended, in good faith, to qualify as a “retirement plan” under the Code or is a public employee pension plan.

Third, Missouri law is similar, in that it exempts from execution and in bankruptcy, any payments under a pension plan, profit sharing plan, IRA and other deferred compensation plans unless they do not qualify under Section 401, etc. of the Code.

The common thread of these laws is that they protect and exempt funds dedicated to the owner’s retirement, restricted as to withdrawals and disbursements and qualified as such under the Code.

However, if the purpose of the fund and the restrictions imposed thereon fall away, which occurs when the owner dies and the account passes to an heir or legatee, then, as the Supreme Court indicated in Clark, the rationale for the exemption no longer exists and the funds should be subject to creditors’ claims. In short, the exemption protects the “saver”/future retiree but not the next generation “spendee”.

As such, this case suggests more broadly that not only IRAs, but also profit sharing accounts, pensions, etc. will no longer be exempt from the claims of creditors once they land in the hands of an inheritor. How broadly the case will be applied, including its applicability to a surviving spouse who inherits an account from his or her deceased spouse, remains to be seen.

But, for now, based on its holding alone, Clark is important for at least two (2) reasons. First, trustees in bankruptcy heretofore are going to be paying much closer attention to “retirement plans” and “retirement funds” in bankruptcy cases in order to see and to determine if the debtor might have inherited the same as opposed to it being their own asset. If a debtor has inherited the account, the trustee will likely seek turnover of those assets. This should result in creditors receiving greater recoveries in those cases then they do now.

Second, from the banker’s standpoint, inquiry should be made of a prospective borrower or customer as to his or her ownership of an IRA, retirement account, profit sharing account, etc. when the same is disclosed on his or her personal financial statement/balance sheet, to-wit:

“Is this your account or is it an inherited account?”

If the latter, such funds/money can probably be taken into consideration in determining what assets, i.e. net worth, the customer has from which recovery/collection of a prospective loan could be made. Additionally, a bank may be able to take a lien or security interest in such an account or fund as collateral for that loan. That, heretofore, has not been possible. A lien thereon can be established and perfected in the same manner as a bank currently takes a pledge/lien in an investment/securities account, i.e. by using a Control Agreement.

Clark suggests that the collection “pot” or “kitty” has just gotten a little bigger. Banks need to take advantage of that, by “globbing onto” the inherited IRA portion of that pot when and as the opportunity arises.


The foregoing is not intended to be legal advice, but rather, to provide accurate information regarding banking law and regulatory matters. For more information regarding any of the foregoing items, please contact any member of our banking practice group: William G. Keller, Jr. (, James A. Rapp (, William M. McCleery, Jr. (, Michael A. Bickhaus (, Christopher W. Pratt ( or Natalie L. Oswald (, at (217) 223-3030 or visit us on the web at We invite and welcome all questions and comments.

Schmiedeskamp Robertson Neu & Mitchell LLP
525 Jersey Street, Quincy, Illinois 62301
(217) 223-3030

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