In 2012, the Fifth Circuit ruled in In re Chilton that inherited IRAs constituted retirement funds within the “plain meaning” of §522 of the Bankruptcy Code and were thus exempt from the bankruptcy estate, under § 522(d)(12) (the federal exemptions). See our prior discussion of this case here.
After Chilton, many thought the issue was settled.
However, in 2013, the Seventh Circuit in Rameker v. Clark disagreed with the Fifth Circuit and instead held that on the death of the IRA owner, even though the inherited IRA was still exempt from immediate taxation, the inherited IRA:
• ceases to be “retirement funds”,
• does not represent retirement funds in the hands of the beneficiary debtor and
• ceases to have the protection afforded to IRAs under the Bankruptcy Code.
The Seventh Circuit specifically held that the funds in an IRA are only “retirement funds” within the meaning of the Bankruptcy Code if the funds are held for the owner’s retirement.
The Seventh Circuit stated that the inherited IRA did not contain “anyone’s retirement funds”, and that the Bankruptcy Code should not be used to exempt from creditors’ reach funds that were freely accessible for current use by the debtor, without penalty.
While recognizing that there was reference to the “debtor’s interest” in other exemptions created under § 522 and there was no reference to the debtor in connection with the exemptions § 522(b)(3)(C) and (d)(12), the Seventh Circuit saw no reason in the Bankruptcy Code to exempt an inherited IRA from creditors based on the use or purpose that the predecessor owner had for the funds when she saved the funds for her retirement.
The Supreme Court has now accepted cert. to resolve this split in the Circuits. In any event, it is once again unclear, except in the few states with specific legislation exempting inherited IRAs from creditors’ reach in bankruptcy, whether an inherited IRA is or is not an exempt asset in a bankruptcy proceeding – until we hear from the Supremes.