Circuit courts split on protecting inherited IRAs

The Supreme Court needs to decide whether an inherited individual retirement account is protected from the claims of creditors in bankruptcy because U.S. circuit courts of appeal are now divided on the issue.

Chief Judge Frank Easterbrook, on the Court of Appeals for the Seventh Circuit in Chicago, disagreed last month with an opinion last year from the Fifth Circuit appeals court in New Orleans. Easterbrook concluded that inherited IRAs are not exempt in bankruptcy.

An IRA funded by someone's own contributions is immune from creditors' claims in bankruptcy. The case before Easterbrook and the other two judges on the appellate panel involved a woman who inherited her deceased mother's $300,000 IRA. After the daughter filed for bankruptcy, the bankruptcy judge ruled that the IRA was not exempt. The district court reversed, and Easterbrook reversed once again.

The Fifth Circuit court reached the opposite result in March 2012, focusing on what it called the "plain meaning" of the statutes. By contrast, Easterbrook focused on how an inherited IRA does "not represent anyone's retirement funds." To make the inherited IRA exempt, he said "would be to shelter from creditors a pot of money that can be freely used for current expenses."

Easterbrook said he did not believe the case was a close question because the IRA was no longer a "fund of retirement savings."

Easterbrook ended his decision saying the opinion was circulated to the other circuit judges and none requested another hearing before all judges on the circuit.