by The Fifth Circuit today held that a debtor may exempt an inherited IRA from the bankruptcy estate under section 522(d)(12). In re Chilton, No. 11-40377 (March 12, 2012) (affirming the decision of the U.S. District Court for the Eastern District of Texas). Under section 522(d)(12) an IRA may be exempted if it meets two requirements: (1) the amount the debtor seeks to exempt must be retirement funds; and (2) the retirement funds must be in an account that is exempt from taxation under one of the specified provisions of the IRC.
With respect to the first requirement, the court found that the plain language of the Code requires only that the funds be “set apart” for retirement and does not require that the funds be contributed by the debtor. The court found support for its decision in section 522(b)(4)(C) which provides that certain transfers of IRA accounts similar to the type in an inherited IRA, do not alter the exempt status of the account.
As to the second requirement for exemption, the court found that the definition of IRAs set forth in section 408(d)(3)(C)(2) of the Tax Code encompasses inherited IRAs and, under section 408(e) inherited IRAs enjoy the same tax exempt status as those funded by the debtor’s own contributions. Therefore the second prong of the exemption test was met.
This case follows closely on the heels of the 9th Circuit BAP decision to the same effect in In re Hamlin, No. 11-1083 (B.A.P. 9th Cir. February 21, 2012).
NACBA filed an amicus brief in support of debtors’ position in this case.