by 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.
Rhode Island law exempts “[a]n individual retirement account or individual retirement annuity as defined in the Internal Revenue Code, 26 U.S.C. §§ 408 and 408A, and the payments or distributions from such an account or annuity.” The Rhode Island Supreme Court turned to the language of 408 to determine whether an inherited IRA is defined in that section. It found that it is. Though sections 408(a) and 408(b) provide definitions of “individual retirement account” and “individual retirement annuity,” the court found reference to an inherited IRA in section 408(d)(3)(C)(ii) relating to tax treatment of rollover accounts. That section provides: “[a]n individual retirement account or individual retirement annuity shall be treated as inherited if– (I) the individual for whose benefit the account or annuity is maintained acquired such account by reason of the death of another individual, and (II) such individual was not the surviving spouse of such other individual.”
The court found that this provision provided a definition of inherited IRA as required for exemption under the state statute. The court found the fact that “inherited IRA” was defined in connection with rollover tax treatment was irrelevant, noting that the state legislature could have limited the scope of the exemption to the definitions in section 408(a) and (b) but chose not to, instead extending the state exemption to encompass the entirety of section 408.
Having reached its conclusion based on statutory text, the court took a moment to address and distinguish Clark v. Rameker, 573 U.S. 122 (2014), where the Supreme Court held that an inherited IRA does not fall under the federal bankruptcy exemption for “retirement funds” under section 522(b)(3)(C). Interpretation of the term “retirement funds” required the Clark Court to examine the similarities and dissimilarities of an inherited IRA and an IRA when held by the original owner. Here, no such analysis was warranted. The state exemption statute referred explicitly to IRAs as defined by section 408 of the IRC, rather than the more ambiguous “retirement funds” exempted in section 522(b)(3)(C). Satisfied that section 408(d)(3)(C)(ii) provided the definition necessary to satisfy the state exemption statute, the court found Clark to be inapplicable. The court noted that states are permitted to offer broader exemptions than those offered under the federal code.
Two justices joined in a dissent in which they argued that the majority’s reliance on section 408(d)(3)(C)(ii) was improper. The dissent reasoned that because the state exemption statute does not include inherited IRAs in its exemptions, the only definitions relevant to the coverage of the exemption statute were those found in sections 408(a) and (b). Unlike paragraphs 408(a) and (b), paragraph 408(d) is not definitional, but rather, deals with tax treatment of rollover distributions. Furthermore, the dissent argued that, because of the significant differences between the two, the majority was wrong to treat inherited IRAs the same way regular IRAs are treated. As determined in Clark, regular IRAs are insurance against destitution in retirement, while inherited IRAs are more akin to a bank account.