Jenner & Block

Firm Files Amicus Brief in Bankruptcy Matter Pertaining to Inherited Retirement Accounts

On February 18, 2014, Jenner & Block filed an amicus brief in the U.S. Supreme Court in the case of Brandon C. Clark and Heidi K. Heffron-Clark v. William J. Rameker, Trustee, et al. The Bankruptcy Code exempts a debtor’s “retirement funds” from claims of creditors. In Clark, the Supreme Court will decide whether that exemption applies to a retirement account that a debtor has inherited from its original owner. The amicus brief, written on behalf of estate and tax expert Professor Seymour Goldberg, explains that the tax treatment of inherited retirement accounts differs substantially from accounts in the hands of their original owners.

For instance, individuals can invest money in their IRAs before payment of taxes during their working lives, but will be penalized if they remove those funds from the IRA before they reach retirement age. In contrast, inherited IRAs are taxed in precisely the opposite manner from IRAs. Whereas IRA owners are encouraged to add money to IRAs, nonspouse beneficiaries are prohibited from adding money to IRAs. And whereas IRA owners are generally prohibited from removing funds from their IRAs prior to retirement age without incurring a penalty, nonspouse beneficiaries are generally required to commence immediate distributions from inherited IRAs, even when they have not yet reached retirement age.

Because the Bankruptcy Code looks in part to tax law to define whether a “retirement account” is exempt from creditor’s claims, the amicus brief argues that these tax considerations demonstrate that inherited retirement funds should not be treated as exempt property against bankruptcy creditors. Indeed, inherited retirement accounts are better characterized as anti-retirement funds: they are structured so as to require immediate consumption of the funds rather than to promote future savings. As such, the brief argues that they are not “retirement funds” within the meaning of the Bankruptcy Code. 

Jenner & Block Partner Matthew S. Hellman led the team that drafted the brief, assisted by Partner Catherine L. Steege and Associate Adam G. Unikowsky.