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CCH® PENSION — 04/19/10

Inherited IRA was not exempt from debtors' bankruptcy estate

Debtors could not claim an exemption for an inherited IRA from their bankruptcy estate because inherited IRAs do not contain retirement funds as required under Bankruptcy Code Sec. 522(d)(12), a U. S. Bankruptcy Court for the Eastern District of Texas has ruled in In re Chilton.

Prior to filing for bankruptcy, one of the debtors inherited an IRA from her mother. The debtor established an IRA to receive the funds from her mother's IRA and the funds were directly transferred to the inherited IRA. After the debtors filed for bankruptcy, they claimed the inherited IRA as exempt from their creditors under Bankruptcy Code Sec. 522(d)(12). The bankruptcy trustee objected to the claimed exemption.

Sec. 522(a)(12) allows an exemption for retirement funds in an account or fund that is exempt from taxation under Secs. 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code.

Looking at the whole statutory text of Bankruptcy Code Sec. 522(d)(12), the court noted that Congress uses the word "retirement" repeatedly to qualify the types of funds and accounts exempted from a bankruptcy estate. Although the Bankruptcy Code does not define "retirement," the term is generally defined as a "withdrawal from one's position or occupation or from active working life." The bankruptcy court concluded that, viewing the words "retirement funds" in their entirety, they cannot be understood to authorize an exemption of an inherited IRA. The assets in the inherited IRA were not retirement funds. The assets were not intended for retirement purposes, but were instead to be distributed to the beneficiary without regard to age or retirement status.

The court further noted that its interpretation agrees with the legislative history of Sec. 522(d)(12). Congress clearly expressed an interest in protecting a debtor's retirement assets even in bankruptcy. However, Congress did not exempt all funds in qualifying accounts, but only "retirement" funds.

The court explained that it could not find any published cases that address the exemption of an inherited IRA under Sec. 522(d)(12). However, the court noted that, in interpreting state exemption statutes, bankruptcy courts have recognized the basic differences between an IRA owned by a debtor and an inherited IRA.

The court concluded that the Chapter 13 trustee had rebutted the prima facie effect of the debtors' claimed exemption and that the inherited IRA was a non-exempt asset of the debtors' bankruptcy estate.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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