Many people going through a divorce end up learning the hard way that contributions to a retirement account of fund during marriage is considered marital property and the court can order that it is divided or apportioned between the parties upon divorce. However, what happens when a party inherits an IRA during the marriage, is that still considered property that needs to be divided upon the divorce?
The Illinois Appellate Court recently determined in In re Marriage of Branit, 2015 IL App (1st) 141297, that it was not marital property that needed to be divided. “ In it it’s decision, the appellate court’s analysis relied primarily on Clark v. Rameker, 134 S. Ct. 2242. In Clark, the Supreme Court held that an inherited IRA did not qualify as ‘retirement funds’ for purposes of a bankruptcy exemption. Specifically, the Court in Clark focused on three characteristics of an inherited IRA that distinguish it from ‘retirement funds’ for purposes of the exemption: the beneficiary, ‘(1) ma never invest additional money in the account; (2) is required to withdraw money from the account no matter how far away he or she is from retirement; and (3) may elect to withdraw the entire balance of the account whenever he or she wants without penalty.’ Because the exemptions are meant to protect a debtor’s ‘essential needs,’ an inherited IRA does not meet the purpose of the exemption. Thus, the Supreme Court primarily focused on the function of an inherited IRA, and whether it served a retirement purpose.” (Illinois Bar Journal February 2016 Vol. 104 No.2 IL LAW UPDATE pg. 18)
When a spouse receives a gift or an inheritance during the marriage, as long as this gift or inheritance is never comingled with marital funds, the spouse who received that gift does not have to split that gift upon divorce. My interpretation of the inherited IRA is that the Court viewed it as a gift, rather than an IRA that needed to be split or apportioned during a divorce.