THE legal question that is posed is whether or not an inherited IRA is exempt in bankruptcy. For instance, your father died two years ago. You inherited his IRA of $250,000. You owe $100,000 of credit card debt which you can no longer pay. You file for Chapter 7 bankruptcy relief to discharge your credit card debt. You declare in your bankruptcy petition that you inherited your father’s IRA of $250,000. You claim the entire amount of $250,000 as exempt asset as a retirement account because retirement accounts are exempt up to $1.0 million under current bankruptcy law. The Chapter 7 trustee objects to your claim of objection arguing that inherited IRA’s are not exempt; Trustee wants to access the $250,000 to pay off your credit card debt of $100,000. You argue that the $250,000 is exempt even though it is inherited because it is an IRA. Who do you think is correct?
There is a split among lower courts which have issued diverging rulings on this issue. Both the 5th and the 8th Circuit court of appeals found that bankruptcy laws specify exemptions for “retirement funds” but do not require those funds to belong to the debtor. If you lived in Texas, you would be under the jurisdiction of the 5th circuit, whereas if you lived in Nebraska, you would be under the jurisdiction of the 8th circuit. If you live in California, you would be under the jurisdiction of the 9th circuit. Because there are differing opinions among the different courts of appeal across the country, the United States Supreme court is needed to make a final ruling on this matter.
There is one case coming from the 7th circuit that is now on appeal with the US Supreme court to resolve the issue once and for all. In re Clark, debtor is a small town pizza shop owner. Mr. & Mrs. Clark declared bankruptcy in 2010 when the pizza shop that they operated in their home town of Soughton, Wisconsin closed due to the recession. “Like a lot of smaller entrepreneurs, over four or five years they weren’t able to make a go of it, and the bankruptcy was driven by that closure,” said their bankruptcy lawyer.
Debtors owed $700,000 to their creditors including their landlord, suppliers, mortgage lender and others. Mrs. Clark inherited $300,000 in IRA from her late mother and claimed that the entire amount was exempt as a retirement account. William Rameker, the trustee objected to the claim of exemption. The trustee’s position was that the $300,000 was accessible to the creditors and that it was part of the bankruptcy estate that he was charged with administering. First, Rameker won but that victory was reversed by a district court. The matter was appealed to the 7th Circuit court of appeals who sided with Rameker, saying creditors could access the inherited IRA. In so ruling, the 7th Circuit disagreed with the 5th and the 8th Circuits. The 7th Circuit held that while bankruptcy laws exempt retirement funds from creditor claims, IRAs cease to be “retirement funds” when inherited from a deceased owner. The 5th and the 8th Circuits have held that IRAs do not cease to be retirement funds when they change hands, and that any asset that was at any time “set apart” for retirement is exempt.
Initial court briefs were due on January 10. Arguments will be due in March. The Supreme Court should have a ruling by June.
You can’t bring your retirement accounts with you to heaven or hell after you die. In fact, you can’t bring anything you own in this world with you to heaven or hell. You should stop worrying about your debt problems and trust in Jesus to guide you out of your debt problems all the way to heaven. When you look at your debt problems from the perspective of eternity, your debt problems as well as your other earthly problems are insignificant. Be thankful that Jesus died for us on the cross so that we can have a chance of entering heaven and spending eternity with Him in joyful bliss.
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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.