Inherited IRAs

In answer to a question certified from the Bankruptcy Court for the District of Rhode Island, the Rhode Island Supreme Court determined that “under the plain and ordinary meaning of the language in § 9-26-4(11) and § 408, an inherited IRA is defined under § 408, and it is, therefore, exempt under § 9-26-4(11).” In re Kapsinow, No. 2018-94-M.P. (R.I. Dec. 11, 2019) (Bankr. D. R.I. 16-11859).

Chapter 7 debtor, Lynette Kapsinow, inherited an IRA from her mother which she sought to exempt from her bankruptcy estate under the Rhode Island exemption laws. It was undisputed that the account when held by the debtor’s mother was a qualified retirement account under 408 of the Internal Revenue Code. Once her mother died, Ms. Kapsinow had access to the funds without penalty, could not make contributions to the account, and was required to take minimum distributions. [Read more…] about Rhode Island Exempts Inherited IRAs

The interpretation in Clark v. Rameker of the federal exemption relating to inherited IRAs does not preclude a state from providing a broader exemption for inherited IRAs in its exemption scheme.

When Waheeda Kara filed for chapter 7 bankruptcy she opted to use Texas state exemptions and claimed an exemption in an inherited IRA under section 42.0021 of the Texas Property Code. The trustee objected to the exemption arguing that it did not meet the criteria set forth in Clark for an exemptible “retirement fund.” The court found that state exemptions permitted her to exempt the IRA and overruled the objection. In re Kara, No. 16-51059 (Bankr. W.D. Tex. July 13, 2017). [Read more…] about Clark v. Rameker Does Not Limit State IRA Exemption

NCBRC has filed an amicus brief on behalf of the NACBA membership in the Supreme Court case of Clark v. Rameker (In re Clark), No. 13-299. The debtor in Clark inherited the funds in her mother’s IRA which were then transferred  into the debtor’s tax-exempt account via a trustee-to-trustee transfer. In the debtor’s later bankruptcy she sought to exempt those funds. The Seventh Circuit created a split in the circuits when it held that a debtor may not exempt her inherited IRA in bankruptcy. In re Clark, 714 F.3d 559 (7th Cir. 2013). The Fifth Circuit had reached the opposite conclusion in Chilton v. Moser, 674 F.3d 486 (5th Cir. 2012). [Read more…] about NACBA Files Amicus in Supreme Court Inherited IRA Case

Despite the recent holding to the contrary by the seventh circuit, the court in In re Trawick, No. 12-12581 (Bankr. C.D. Cal. Aug. 29, 2013), held that inherited IRAs may be exempt under section 522(b)(3)(C). Exemptibility is contingent upon two elements: 1) that the IRA has received a favorable determination under IRC section 7805, or is otherwise in compliance with the requirement of the IRC, and 2) that the funds in the account are “retirement” funds. Here, the court noted that there is a split in the circuits as to whether inherited IRAs can ever be exempt, under the second factor, since the debtor himself did not contribute the funds toward his own retirement. See, e.g. Chilton v. Moser, 674 F.3d 486 (5th Cir. 2012); Mullen v. Hamlin, 465 B.R 863 (B.A.P. 9th Cir. 2012); Doeling v. Nessa, 426 B.R. 312 (B.A.P. 8th Cir. 2010) (exempt); In re Clark, 714 F.3d 559 (7th Cir. 2013), petition for cert. filed, No.13-299 (Sept. 6, 2013) (never exempt).

[Read more…] about Lower Court Sides with “Majority View” with respect to Inherited IRAs

On May 4, NACBA filed an amicus brief in the consolidated cases of Rameker v. Clark, No. 12-1241 and, Adili v. Clark, No. 12-1255 (7th Cir.) on the issue of whether a debtor may exempt an inherited IRA under section 522(b)(3)(C). NACBA has been actively involved in the successful presentation of this issue in courts around the country, arguing that the plain language of the Bankruptcy Code and the Internal Revenue Code militates in favor of recognizing the exemption. The Bankruptcy Code exempts from the debtor’s estate “retirement funds to the extent that those fund are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.” Section 408(e) of the IRC provides that any IRA, including one that is inherited from a non-spouses, is exempt from taxation.

Recently, debtors obtained favorable outcomes on this issue in the Fifth Circuit, In re Chilton, No. 11-40377 (5th Cir., March 12, 2012) (exemption under section 522(d)(12)), and the Bankruptcy Appellate Panel for the Ninth Circuit, In re Hamlin, No. 11-1083 (B.A.P. 9th Cir. February 21, 2012). NACBA has also filed an amicus brief on this issue in the Bankruptcy Court District of Massachussetts. In re Seeling, No. 11-30957 (Bankr. D. Mass.)

 

The Bankruptcy Appellate Panel for the Ninth Circuit has found that debtors may exempt an inherited IRA from the bankruptcy estate under section 522(b)(3)(C). In re Hamlin, No. 11-1083 (B.A.P. 9th Cir. February 21, 2012). Under section 522(b)(3)(C) 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 provisions of the [IRC].”

The trustee argued that inherited IRAs do not qualify as “retirement funds” as they are not funds that the debtor personally amassed for retirement purposes. The court found that the plain language of the Code does not limit “retirement funds” to those contributed by the debtor. As the funds at issue were contributed to a retirement fund they retain their status as “retirement funds” upon transfer. As to the second requirement for exemption, the court found that, under section 408(e) of the Tax Code, 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. Finally, 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.

NACBA filed an amicus brief in support of debtors’ position in this case.

The Fifth Circuit heard oral arguments on this issue on February 8th in the case of In re Chilton, No. 11-40377. NACBA filed an amicus brief in that case as well.

Hamlin opinion