In Clark v. Rameker<\/u>, the United States Supreme Court held that an inherited IRA does not fall within the definition of retirement funds under Federal Bankruptcy law and is, therefore, not exempt from claims in a bankruptcy proceeding.\u00a0 This decision had a considerable impact upon the estate planning world.<\/p>\n
It has long been the law that IRA or other retirement accounts, as defined in 11 U.S.C. \u00a7 522(b)(3)(C) are exempt from the reach of a bankruptcy trustee.\u00a0 In the Clark<\/u> decision, the Court was called upon to decide whether funds contained an inherited<\/u> Individual Retirement Account (\u201cIRA\u201d) qualify as retirement funds \u201cwithin the meaning of the bankruptcy exemption\u201d.\u00a0 The Court found that an inherited IRA does not qualify for the bankruptcy exemption.\u00a0 In making its decision, the Court identified three independent characteristics which differentiate an IRA from an inherited IRA.\u00a0 Unlike traditional IRAs or Roth IRAs, where one can make an additional contribution to the IRA, the owner\/beneficiary of an inherited IRA may never invest additional money in the account.\u00a0 Secondly, an individual owner of an inherited IRA is required to make mandatory required distributions from the account annually beginning in the year after the deceased owner\u2019s death, based upon the life expectancy of the individual who has inherited the IRA account.\u00a0 This is in direct contrast to the owner of a traditional IRA who must withdraw funds without penalty only when he or she is close to retirement age, i.e. age 59 \u00bd.\u00a0 Thirdly, the Court noted that one who has inherited an IRA account may withdraw the entire balance at any time and for any purpose without penalty.\u00a0 The owner of a traditional IRA or other retirement account will pay a ten percent (10%) penalty, subject to some very narrow exceptions, if he withdraws prior to age 59 \u00bd.\u00a0 For these reasons, the Court held that an inherited IRA may not benefit from the protection afforded to the owner or participant in a traditional retirement account.<\/p>\n
Interestingly, in New Jersey, however, it has been determined that an inherited IRA constitutes a \u201cqualifying trust\u201d under N.J.S.A. 25:2-1(b) and as such will be excluded from a debtor\u2019s bankruptcy estate.\u00a0 In Re: Andolino<\/u>, 525B.R.588.\u00a0 The New Jersey Bankruptcy Court found that the language of the New Jersey Statutes exempts the inherited IRA from the bankrupt\u2019s estate.\u00a0 In that regard, N.J.S.A. \u00a7 25:2-1(b) provides that \u201cany property held in a qualifying trust and any distributions from a qualifying trust, regardless of the distribution plan elected for the qualified trust, shall be exempt from all claims of creditors and shall be excluded from the estate in bankruptcy\u201d. Id.<\/u>\u00a0 A \u201cqualifying trust\u201d refers to a trust \u201ccreated or qualified and maintained pursuant to Federal law, including but not limited to \u00a7 408 of the Internal Revenue Code of 1986.\u00a0 The Bankruptcy Court in New Jersey noted that the IRA\u2019s \u201cstatus as a qualifying trust remains unchanged, notwithstanding the debtor\u2019s receipt of the IRA as a beneficiary\u201d.\u00a0 Andolino<\/u> supra<\/u>, at 591.<\/p>\n