By Andrew J. DeMaio
March 15, 2015
In Clark v. Rameker, 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 bankruptcy proceedings under Bankruptcy Code section 522(b)(3). Therefore, an IRA account inherited by a Wisconsin debtor was available to her creditors in bankruptcy.
Left unanswered, however, was the question how an inherited IRA is treated when a New Jersey debtor declares bankruptcy. The U.S. Bankruptcy Court for the District of New Jersey has answered that question in a decision issued on February 25, 2015, In re Andolino.
When Christopher Andolino declared bankruptcy, he asserted that the $120,000 IRA account that he had inherited from his mother should be excluded from his bankruptcy estate. The bankruptcy trustee sought to include the IRA, citing Clark v. Rameker.
A New Jersey statute, N.J.S. 25:2-1b, protects any "qualifying trust", including an IRA account, from the claims of creditors. A 1997 Third Circuit Court of Appeals decision, In re Yuhas, established that an IRA account created and owned by a New Jersey debtor is excluded from the bankruptcy estate because the statute restricts the transferability of the account. In Andolino, the question was whether an inherited IRA is similarly restricted, making it unavailable in bankruptcy.
Bankruptcy Court Judge Michael Kaplan held that the protective statute applies to an IRA account even after the death of the original owner. A "qualifying trust", he reasoned, includes any IRA subject to the provisions of Internal Revenue Code section 408. Even after the death of the original owner, an IRA remains subject to a set of "unique tax implications and restrictions". Thus, the account does not suddenly lose its exemption upon transfer to a designated beneficiary.
The Andolino decision is welcome news for those seeking to protect and preserve assets from the claims of creditors. However, as we noted in a prior post, clients planning the disposition of retirement funds may still wish to consider the use of a trust because their beneficiaries may reside in states other than New Jersey.