Clark v. Rameker Does Not Limit State IRA Exemption

Posted by NCBRC - August 25, 2017

The interpretation in Clark v. Rameker of the federal exemption relating to inherited IRAs does not preclude a state from providing a broader exemption for inherited IRAs in its exemption scheme.

When Waheeda Kara filed for chapter 7 bankruptcy she opted to use Texas state exemptions and claimed an exemption in an inherited IRA under section 42.0021 of the Texas Property Code. The trustee objected to the exemption arguing that it did not meet the criteria set forth in Clark for an exemptible “retirement fund.” The court found that state exemptions permitted her to exempt the IRA and overruled the objection. In re Kara, No. 16-51059 (Bankr. W.D. Tex. July 13, 2017).

The court began with a look at the reach of Clark v. Rameker, 134 S. Ct. 2242 (2014). There, the Court held that in order for an inherited IRA to be exempt under section 522(b)(3)(C) it must have two qualities: The funds must be “retirement funds,” and they must be held in a tax-exempt account under the Internal Revenue Code. The Court considered three factors in determining that the account at issue was not a retirement account. First, the debtor could not contribute her own funds to the account. Second, the debtor was required to withdraw all the funds within five years or take minimum required distributions. Third, the debtor could withdraw the funds without penalty. Because of these three factors, the Court concluded that the funds were not “retirement funds” and could not be exempted under section 522(b)(3)(C).

In addressing the applicability of Clark to the case before it, the Kara court found guidance in In re Pacheco, 537 B.R. 935 (Bankr. D. Ariz. 2015). In that case, the court determined at the outset that the state IRA exemption was not preempted by the federal exemptions because Congress had provided for federal/state alternative exemption schemes. The Pacheco court further found that the federal exemption for IRAs represented a floor rather than a ceiling with respect to the reach of that exemption, and that states may provide for broader exemptions than those provided in the Bankruptcy Code.

Having therefore determined that its decision was not governed by Clark, the Kara court turned to the state exemption which provides in part, “[A] person’s right to the assets held in or to receive payments, . . . under any . . . individual retirement account . . .including an inherited individual retirement account, . . .is exempt from attachment, execution, and seizure for the satisfaction of debts to the extent the . . . account is exempt from federal income tax.” The court found this language to be explicitly broader than the federal exemption.

Relying on the fact that the IRA in this case was an “inherited individual retirement account” as defined in 21 U.S.C. § 408(d)(3)(C) and was therefore exempt from taxation pursuant to 26 U.S.C. § 408(e) at the time of transfer, the court found that the IRA fell within the language of section 42.0021 and was properly exempted under state law.

Kara Bankr WD Tex opinion July 2017

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