Lower Court Sides with “Majority View” with respect to Inherited IRAs

Posted by NCBRC - September 11, 2013

Despite the recent holding to the contrary by the seventh circuit, the court in In re Trawick, No. 12-12581 (Bankr. C.D. Cal. Aug. 29, 2013), held that inherited IRAs may be exempt under section 522(b)(3)(C). Exemptibility is contingent upon two elements: 1) that the IRA has received a favorable determination under IRC section 7805, or is otherwise in compliance with the requirement of the IRC, and 2) that the funds in the account are “retirement” funds. Here, the court noted that there is a split in the circuits as to whether inherited IRAs can ever be exempt, under the second factor, since the debtor himself did not contribute the funds toward his own retirement. See, e.g. Chilton v. Moser, 674 F.3d 486 (5th Cir. 2012); Mullen v. Hamlin, 465 B.R 863 (B.A.P. 9th Cir. 2012); Doeling v. Nessa, 426 B.R. 312 (B.A.P. 8th Cir. 2010) (exempt); In re Clark, 714 F.3d 559 (7th Cir. 2013), petition for cert. filed, No.13-299 (Sept. 6, 2013) (never exempt).

The Trawick court joined the “majority” view that funds in an inherited IRA may be exempted under IRC section 408(e) and section 522(b)(3)(C) of the Bankruptcy Code as neither section includes the requirement that the retirement funds in the account be contributed by the debtor or the debtor’s spouse. The court thus disagreed with the Clark court’s finding that the funds had to have been contributed to the account for the benefit of the debtor either by the debtor himself, or by the debtor’s spouse. The Trawick court concluded that the Clark decision rested not on the language of the relevant statutes, but upon policy considerations imposed by the court.

The court did not grant summary judgment to the debtor, however, as the debtor had failed to meet his burden under the first showing that the account complied with the IRC requirements. Although, in general, the party objecting to a claimed exemption bears the burden of proving its inapplicability, section 522(b)(4)(B) specifically places the burden on the debtor to show compliance with the IRC in the absence of a 7805 determination.

The issue is currently on a petition for certiorari in the Supreme Court in In re Clark, No. 13-299 (Sept. 6, 2013).

Trawick opinion

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