Creditors Can Reach Inherited IRA Under Kansas Law

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By Stephanie Cumings

Nov. 3 — Kansas debtors can't count on a state statute exempting “retirement plans” from collection to protect inherited individual retirement accounts in bankruptcy.

In an Oct. 30 decision, Judge John W. Lungstrum of the U.S. District Court for the District of Kansas relied on a recent Supreme Court decision that held that inherited IRAs aren't exempt in bankruptcy under the Bankruptcy Code.

No Material Difference Between Statutes

After Rebecca Mosby filed for Chapter 7 bankruptcy, she tried to claim an exemption for a $15,000 IRA she had inherited from her mother. The trustee in her case objected to the exemption.

The bankruptcy court sided with the trustee and found that the inherited IRA wasn't exempt under a Kansas statute that exempts “retirement plans” from collection. The bankruptcy court relied on Clark v. Rameker, 2014 BL 162671, 134 S. Ct. 2242 (2014), in which the Supreme Court held that inherited IRAs aren't “retirement funds” within the meaning of Section 522(b)(3)(C) of the Bankruptcy Code. 

The bankruptcy court found Clark applicable, saying there was “no material difference between the federal and Kansas exemptions.” Mosby appealed to the district court.

Not a ‘Retirement Plan.'

The district court sided with the trustee and bankruptcy court, finding that an inherited IRA isn't a “retirement plan” within the meaning of the Kansas statute. The district court also relied on the reasoning from Clark.

“In applying the ordinary meaning of the term, the [Supreme Court in Clark] held that ‘retirement funds' means, under an objective standard (not case-by-case), ‘sums of money set aside for the day an individual stops working,'” the district court said.

The court said that the Supreme Court and the Kansas Supreme Court would likely similarly construe the Kansas statute regarding “retirement plans.” Therefore, the court held that “because an inherited IRA differs from other IRAs with respect to the holder’s ability and incentive to save for retirement[,] an inherited IRA does not constitute a ‘retirement plan.'”

Being a Beneficiary Doesn't Matter

The court rejected Mosby's argument that the inherited IRA was originally a qualifying “retirement plan,” finding that “such a backward-looking interpretation would render meaningless the requirement that the funds presently be in a ‘retirement plan' (and not merely that they be in an account qualified under the particular sections of the tax code).”

Mosby also tried to argue that the statute was intended to protect her because it protects retirement plans that are payable to “a participant or beneficiary.” Mosby argued that the use of the term “beneficiary” was intended to refer to the recipients of inherited IRAs, but the court disagreed and found that “the use of ‘beneficiary' in the statute does not suggest that the exemption must cover all situations involving beneficiaries whether or not the requirement of a ‘retirement plan' has been met.”

Other Courts Applying Clark

Other courts have made similar rulings in the wake of Clark. For example, a Louisiana district court relied on Clark in holding that an inherited IRA is not an exempt “tax-deferred arrangement” under Louisiana law. An Illinois state court also held that an inherited IRA wasn't exempt from collection efforts under an Illinois statute that exempts “retirement plans,” again citing Clark.

But a Minnesota bankruptcy court refused to extend the reasoning in Clark to an inherited tax code Section 529 plan, which is a tax-advantaged savings plan used for future college costs.

The debtor was represented by Ryan Lee White of Evans & Mullinix PA, Shawnee, Kan. The trustee was represented by Shane J. McCall of Lentz Clark Deines PA, Overland Park, Kan.

To contact the reporter on this story: Stephanie Cumings in Washington at

To contact the editor responsible for this story: Jay Horowitz at

Text of the opinion is at