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The United States Supreme Court has ruled that inherited Individual Retirement Accounts (IRAs) are not protected under federal exemption laws.   Clark  v. Ramekers, 573 U.S. ____ (2014).  Even though inherited IRAs are exempt under federal income tax laws, the court said they are not really “retirement funds” under Section 522(b)(3)(C) of the Bankruptcy Code.  Justice Sotomayor cited three key legal characteristics of inherited IRA accounts that are exactly opposite of how normal retirement funds operate:

• The inherited IRA recipient may never invest additional money into the account. 
• Inherited IRA beneficiaries must withdraw funds from the account right now regardless of how many years they have to retire. 
• There is no tax penalty for withdrawing funds from an inherited IRA.

Whereas normal retirement accounts allow ongoing contributions, encourage savers to keep funds in the account and penalize those who take out money early, inherited IRAs do the opposite and thus are not really “retirement funds” in the eyes of the Supreme Court.  Although some beneficiaries may use the inherited funds for retirement, the Court was not satisfied.

The possibility that some investors may use their inherited IRAs for retirement purposes does not mean that inherited IRAS bear the defining legal characteristics of retirement funds.

Although a spouse may roll over an inherited IRA to his or her own IRA account and thus exempt the funds, children may not take advantage of the roll over option.
So, what is the status of inherited IRA accounts in Nebraska?  In addition to the federal exemption provided under §522(b)(3)(C), Nebraska has traditionally allowed debtors to exempt IRA accounts under Nebraska Statute 25-1563.01.  That statute exempts “to the extent reasonably necessary for the support of the debtor and any dependent of the debtor, an interest held under a stock bonus, pension, profit-sharing, or similar plan or contract payable on account of illness, disability, death, age, or length of service.”  
Is an inherited IRA account a retirement fund that is “payable on account of illness, disability, death, age or lenght of service” of a debtor in a Nebraska bankruptcy case?  The same arguments used by Justice Sotomayor against extending the federal exemption to inherited IRA accounts could also be used aginst the Nebraska exemption statute as well.  So, until there is a new local ruling on this topic I would assume that all inherited IRA accounts are at risk in bankruptcy.  
Image courtesy of Flickr and State Library of New South Wales.
 

Chapter 11 bankruptcy, also known as “reorganization bankruptcy,” is a bankruptcy plan that allows corporations, partnerships and individuals to reorganize their finances and restructure their debt. Unlike Chapter 13 bankruptcy cases, Chapter 11 bankruptcy has no debt ceiling. This plan is popular with both large and small businesses that need to restructure their debt. The... Read more »
The post Understanding Your Plan of Reorganization for a Chapter 11 Bankruptcy appeared first on AllmandLaw.

Chapter 11 bankruptcy, also known as “reorganization bankruptcy,” is a bankruptcy plan that allows corporations, partnerships and individuals to reorganize their finances and restructure their debt. Unlike Chapter 13 bankruptcy cases, Chapter 11 bankruptcy has no debt ceiling. This plan is popular with both large and small businesses that need to restructure their debt. The […]
The post Understanding Your Plan of Reorganization for a Chapter 11 Bankruptcy appeared first on Allmand Law Firm PLLC.

On  January 9, 2014, the U.S. Supreme Court delivered its decision in the case of  Executive Benefits Insurance Agency v. Arkison. The case presented the question of whether a bankruptcy judge could constitutionally hear the presented fraudulent conveyance claim and per the relevant statute make a report and recommendations to the district court for de novo review and a decision. This question to be decided was whether the statutory powers given to a bankruptcy judge by Congress to allow it to hear this type of case and present a report and recommendation to the district court for it to make its judgment, exceeded the limits of Article III of the Constitution.  
Constitutional and Statutory Background Article III  §1 of the Constitution commands that "[t]he judicial Power of the United States shall be vested in one supreme Court and in such inferior Courts as the Congress may from time to time ordain and establish" and provides that the judges of these constitutional courts "shall hold their Offices during good Behaviour" and "receive for their Services [ ] a Compensation [ ] [that] shall not be dimished" during their tenure. Bankruptcy courts were not created under Article III, but are appointed for 14-year terms by the courts of appeals in their district pursuant to the Bankruptcy Amendments and Federal Judgeship Act of 1984.  
Pursuant to 28 U.S.C. §1334(a) the district courts of the United States, which are Article III courts,  have "original and exclusive jurisdiction in all cases" under the bankruptcy code. However pursuant to 11 U.S.C.  §157 (d), most district courts refer all bankruptcy cases to the bankrkuptcy judges of their district pursuant to a general standing order of reference. Purusant to 11 U.S.C.  §157 (b) and (c),  bankruptcy judge may hear and enter final judgments in "core proceedings arising under title 11, or arising in a case under title 11." But pursuant to 11 U.S.C. §157 (c),  although a bankruptcy judge may determine a referred proceeding that "is not a core proceeding, but ... is other-wise related to a case under title 11", the bankruptcy judge must submit proposed findings of fact and conclusions of law to the district court which then enters final judgment after a de novo review. 
Stern v. Marshall
The case before the Supreme Court is a follow-up to its 2011 decision in Stern v. Marshall. In Stern, the Supreme Court held that as bankrutcy judges are not Article III judges, they do not have the power under Article III of the Constitution to rule on the type of claim presented in Stern, which was a counterclaim for tortious interference.The Court held that even though  "bankruptcy courts are statutorily authorized [by Congress] to enter final judgment on a class of bankruptcy related claims, Article III of the Constitution prohibits bankruptcy courts from finally adjudicating certain of those claims." The claims being referred to was a category of claims deemed "core" matters by Congress. The tortious interference claim presented in Stern was in this class of claims. The Court did not, though, address how bankruptcy courts should proceed when they encounter a Stern claim.
Court's HoldingThe Supreme Court in Executive Benefits Insurance v. Arkison held that when a bankruptcy court is presented with a Stern claim, "the proper course is to issue findings of fact and conclusion of law" which
the district court will then review de novo and enter judgment. That is, a claim such a Stern claim,  may proceed in the bankruptcy court as "non-core" proceedings and the bankruptcy court may only issue findings of fact and conclusion of law to then be send to the district court for de novo review and issuance of judgment.  The Court stated that "[t]his approach accords with the bankruptcy statute and does not implicate the constitutional defect identified by Stern."

Jordan E. Bublick is a Miami Bankruptcy Lawyer with over 25 years of experience in filing Chapter 13 and Chapter 7 Bankruptcy Cases and Mortgage Modifications (305) 891-4055