Source: https://hjlawfirm.com/supreme-court-will-decide-whether-bankruptcy-protection-applies-to-inherited-iras/
Timestamp: 2019-12-12 03:32:04
Document Index: 566526833

Matched Legal Cases: ['§522', '§522', '§522', '§522', '§522', '§522']

Supreme Court will decide whether bankruptcy protection applies to inherited IRAs | Hellmuth & Johnson
January 16, 2014 December 13, 2018 | Earl H. Cohen
However, next door in Wisconsin and throughout the Seventh Circuit, the federal court has ruled that the exemption will depend upon the status of the owner of the IRA. In the case of In re Brandon Clark, the court held that a debtor’s inherited IRA may not qualify for a bankruptcy exemption under Bankruptcy Code §522(b)(3)(C). As we explain below, the Seventh Circuit decision conflicts with decisions of both the Fifth and Eighth Circuits. The Supreme Court has agreed to accept the case to resolve the conflict. (Clark, Brandon C., In re (2013, CA7), 714 F.3d 559, 2013 WL 1729600 , cert granted (2013, S.Ct.) 2013 WL 4776520 )
As a matter of background, for a retirement plan asset to qualify for a bankruptcy exemption under 11 USC 522(b)(3)(C) it must meet two requirements: (1) the amount the debtor seeks to exempt must be “retirement funds,” and (2) those retirement funds must be exempt from income taxation under one of several specified Internal Revenue Code provisions, including Code Sec. 408 , which provides a tax exemption for IRAs.
Let’s take a look at the facts and the Clark decision. In August of 2000, Ruth Heffron established an individual retirement account (IRA) and named her daughter, Heidi Heffron-Clark, as the sole beneficiary. Ruth Heffron died in September of 2001, and the account passed to Heidi. In December of 2001, Heidi had the balance in her mother’s IRA transferred to an inherited IRA. Heidi and her husband (the debtors) took monthly distributions from the inherited IRA. Neither Heidi nor her husband were retired at the time.
There are conflicting decisions in at least two other federal Circuits, the fifth circuit and the eighth circuit, which includes Minnesota. Under the leading cases of Chilton v. Moser (2012, CA5) 674 F3d 486 and Doeling v. Nessa (2010, Bktcy CA8) 426 BR 312 , the funds in a debtor’s inherited IRA do not have to be the debtor’s “retirement funds” (a term that the Bankruptcy Code does not define) to satisfy the bankruptcy exemption requirements under Bankruptcy Code §522(b)(3)(C) or §522(d)(12). It is enough if the funds were ever “retirement funds.”
The Seventh Circuit disagreed with these decisions. Unlike the courts in Chilton and Nessa, the Seventh Circuit said that the word “retirement” in “inherited individual retirement account” designated the funds’ source, not their current status (i.e., as non-retirement funds). Unlike a regular IRA, an inherited IRA is a time-limited, tax-deferral vehicle, but not for holding wealth for use after the new owner’s retirement, the court said. Heidi, as owner of the inherited IRA, was required to begin taking distributions under the Code Sec. 401(a)(9) required minimum distribution rules, even though she was still working. The Seventh Circuit noted that, instead of being dedicated to Heidi’s retirement years, the inherited IRA had to begin distributing assets within a year of Ruth’s death, and the payout had to be completed in as little as five years. Money counts as “retirement funds” only when held for the owner’s retirement. However, the bankruptcy court had concluded in the case before the court that Heidi was not preserving the IRA for her retirement. Thus, the funds in the inherited IRA did not meet this standard. The Seventh Circuit agreed, finding that the bankruptcy judge “got this right.”
It should be noted that the Seventh Circuit did not mention Bankruptcy Code §522(b)(4)(C), to which the courts in Chilton and Nessa referred, as support for the bankruptcy exemption of inherited IRAs. Bankruptcy Code §522(b)(4)(C) provides that retirement funds in an account that is tax-exempt under specified Code sections, including Code Sec. 401 and Code Sec. 408, do not cease to qualify for the bankruptcy exemption because of a direct transfer of those funds. The Chilton court said that this meant that the direct transfer of “retirement funds” did not alter their status as “retirement funds.”
The Seventh Circuit said that by the time Heidi and her husband filed for bankruptcy, the money in the inherited IRA did not represent anyone’s retirement funds, the Seventh Circuit said. To treat this account as exempt under Bankruptcy Code §522(b)(3)(C) would be to shelter from creditors a “pot of money” that could be freely used for current consumption. Thus, the Seventh Circuit reversed the district court’s decision, and thereby created a conflict among the circuits.
Posted in Collections, Creditor Remedies & Bankruptcy, Estate Planning
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