Debtor May Exempt Inherited IRA

Posted by NCBRC - February 28, 2012

The Bankruptcy Appellate Panel for the Ninth Circuit has found that debtors may exempt an inherited IRA from the bankruptcy estate under section 522(b)(3)(C). In re Hamlin, No. 11-1083 (B.A.P. 9th Cir. February 21, 2012). Under section 522(b)(3)(C) an IRA may be exempted if it meets two requirements: “(1) the amount the debtor seeks to exempt must be retirement funds; and (2) the retirement funds must be in an account that is exempt from taxation under one of the provisions of the [IRC].”

The trustee argued that inherited IRAs do not qualify as “retirement funds” as they are not funds that the debtor personally amassed for retirement purposes. The court found that the plain language of the Code does not limit “retirement funds” to those contributed by the debtor. As the funds at issue were contributed to a retirement fund they retain their status as “retirement funds” upon transfer. As to the second requirement for exemption, the court found that, under section 408(e) of the Tax Code, inherited IRAs enjoy the same tax exempt status as those funded by the debtor’s own contributions. Therefore the second prong of the exemption test was met. Finally, the court found support for its decision in section 522(b)(4)(C) which provides that certain transfers of IRA accounts similar to the type in an inherited IRA, do not alter the exempt status of the account.

NACBA filed an amicus brief in support of debtors’ position in this case.

The Fifth Circuit heard oral arguments on this issue on February 8th in the case of In re Chilton, No. 11-40377. NACBA filed an amicus brief in that case as well.

Hamlin opinion

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