Law Offices of James V. Sansone
Schedule an initial consultation
Santa Rosa 707-623-1875
Ukiah 707-993-4068

Are Inherited IRA's Exempt From The Bankruptcy Estate?

401k-nest-egg-thumb-275x226-46874.gifAccording to the 5th Circuit Court of Appeals the answer is NO! In the case of In re Chilton, 426 B.R. 612 (Bankr. E.D. Tex. 2010), A bankruptcy debtor inherited an individual retirement account (IRA) from the debtor's deceased parent prior to the debtor's bankruptcy, and the debtor claimed an exemption in the property pursuant to 11 U.S.C.S. § 522(d)(12).

Pursuant to 11 U.S.C. § 522(d)(12), a debtor is permitted to exempt certain property, including "Retirement funds to the extent that those funds 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 1986The bankruptcy trustee objected to the exemption.

The debtor placed the funds distributed from the parent's IRA into a new account created in the deceased parent's name from which the debtor, as the beneficiary of the new account, was required take distributions prior to retirement. The debtor contended that the new account was tax exempt and contained retirement funds, and thus the funds in the account were exempt from claims of creditors.

The bankruptcy court held that, while the funds in the account were tax-exempt prior to distribution, the funds in the account did not constitute retirement funds to support the claimed exemption. The funds contained in the inherited IRA were not funds intended for retirement purposes but, instead, were distributed to the debtor as the beneficiary of the account without regard to age or retirement status. In any event, the account established by the debtor to receive the distribution of funds from the parent's IRA was not a traditional IRA which was exempt from taxation under federal tax law.

However, the 9th Circuit, our circuit, disagrees. Compare In re Hamlin, 465 B.R. 863. In Hamlin, a case that was one of first impression in the 9th Circuit. In Hamlin, Appellant Chapter 7 trustee sought review of an order from the United States Bankruptcy Court for the District of Arizona, which allowed debtors' claimed exemption under 11 U.S.C.S. § 522(b)(3)(C) for an individual retirement account (IRA) inherited from her grandmother pre-petition.

The court held that a debtor could exempt funds in an IRA inherited from a non-spouse under 11 U.S.C.S. § 522(b)(3)(C).

Here, the debtor inherited the IRA from her grandmother and opted to have a trustee-to-trustee transfer, making the funds still exempt under I.R.C. § 408(e). The court noted that, for an IRA to be exempt under § 522(b)(3)(C), it must consist of retirement funds and be in an account that is exempt from taxation under one of the provisions specified in § 522(b)(3)(C), including I.R.C. § 408(e).

Section 522(b)(3)(C) does not specify that the funds must be the debtor's retirement funds. The court reasoned that limiting the exemption to funds the debtor herself contributed for retirement would impermissibly limit the statute beyond its plain language. Even though inherited IRA here did not contain the debtor's own retirement funds, they were originally contributed by the grandmother as retirement funds and retained that status when they were transferred via a trustee-to-trustee transfer in compliance with the Internal Revenue Code.

So, what is the bottom line? It appears that inherited IRAs in the 9th Circuit, if exempt from taxation, maybe non-estate property. There is a clear split of authority within the circuits on this issue. At some point in time the US Supreme Court may need to step in and provide one unified answer to this question.

The Law Offices of James V. Sansone assists individuals file for bankruptcy protection under the United States Bankruptcy Code. We are located in Santa Rosa, California and serve clients throughout Sonoma County, Mendocino County, and Lake County, including Santa Rosa, Petaluma, Cotati, Rohnert Park, Sebastopol, Healdsburg, Sonoma, Kenwood, Glen Ellen, Windsor, Bodega Bay, Ukiah, Willits, Clearlake, Lakeport, and Kelseyville.

No Comments

Leave a comment
Comment Information

Reviews For Our Office
in Ukiah, CA

powered by BirdEye

Reviews For Our Office
in Santa Rosa, CA

powered by BirdEye
Email Us For A Response

Request A Consultation

Bold labels are required.

Contact Information

The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.


Privacy Policy

Office Locations

Santa Rosa Office
1260 N. Dutton Avenue, Suite 239
Santa Rosa, CA 95401

Toll Free: 800-836-1298
Phone: 707-623-1875
Santa Rosa Law Office Map

Ukiah Office
215 W. Standley St.
Suite 10
Ukiah, CA 95482

Toll Free: 800-836-1298
Map & Directions