Are Inherited IRAs Exempt in Bankruptcy?

August 1, 2013

Although bankruptcy is a federal law contained under the federal court system, the interpretation of the law can vary from state to state and jurisdiction to jurisdiction. One example is two recent decisions on the exemption status of inherited IRA accounts.

A 7th circuit decision In re Clark 714 F.3d 559 recently held that an IRA that was inherited by a debtor before their chapter 7 bankruptcy case was filed, was non-exempt and was property of the bankruptcy estate. The debtor in the case inherited an IRA account from her mother prior to filing bankruptcy; upon filing bankruptcy the account was claimed as exempt under the federal exemption code 522(d)12, which exempts qualified retirement accounts. The chapter 7 Trustee objected to the claim of exemption, and the Bankruptcy Court upheld the objection. Then the District Court reversed, but was overturned on appeal. In its holding the 7th circuit found that the inherited IRA did not qualify as a “retirement account” under the statute but was instead “a time-limited tax-deferral vehicle, but not a place to hold wealth for use after the new owner’s retirement.”

The Court’s decision in this case is in contrast to a previous decision out of the 5th circuit which includes Texas, and Louisiana. The 5th circuit in In re Chilton, 674 F. 3d 486, held that retirement funds in an inherited IRA do qualify as a “retirement account” under the language of 522(d)12 and therefore would be exempt.

Insuring that your property is exempt can be a complicated and detail oriented endeavor. It is important that you disclose all of your assets and the source of those assets to your attorney prior to filing bankruptcy. The experienced attorney’s at Fears Nachawati can review your assets and verify that the correct exemption codes are used to protect your property. For a free consult call us today at 1.866.705.7584.

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