A Chapter 13 trustee cannot seize any IRA. The worst the trustee can do is insist that the Chapter 13 plan provides to unsecured creditors an amount equal to the non-exempt value of the inherited IRA. Whether the inherited IRA is exempt is a question of federal law for those states that have not opted-out of the federal exemptions (11 U.S.C. §522(b)) and a question of state law for those states that have opted-out.
A Chapter 7 trustee has greater powers than a Chapter 13 trustee. A Chapter 7 trustee can seize and force the turnover of non-exempt inherited IRAs. So the question is whether the inherited IRA is exempt or non-exempt from seizure. This issue was addressed in In re Everett, 520 B.R. 498 (E.D.LA 2014). In Everett, the taxpayer inherited an IRA from her ex-spouse and transferred the inherited IRA into a new IRA in her name. Later, a creditor obtained a $245,000 judgment against the taxpayer and claimed an interest in the inherited IRA. Taxpayer responded by filing bankruptcy to discharge the debt. Taxpayer identified the inherited IRA as an asset and claimed the asset was exempt from collection. Creditor objected to the exemption.
The Everett court found that the inherited IRA was NOT exempt under federal law. The court cited the U.S. Supreme Court’s ruling in Clark v. Rameker, 134 S.Ct. 2242 (2014) that held inherited IRAs are not “retirement funds” within the meaning of §522(b)(3)(C) and therefore are not exempt assets. The Supreme Court distinguished IRAs from inherited IRAs. Inherited IRAs do not operate like ordinary IRAs. Unlike with a traditional or Roth IRA, an individual may withdraw funds from an inherited IRA at any time without paying a tax penalty. Indeed, the owner of an inherited IRA not only may but must withdraw its funds. The owner must either withdraw the entire balance in the account within five years of the original owner’s death or take minimum distributions on an annual basis. And unlike with a traditional or Roth IRA, the owner of an inherited IRA may never make contributions to the account. Consequently, the Everett court found that the taxpayer’s inherited IRA cannot be exempted under federal exemption laws of §522(b)(3)(C).
The Everett court next noted that that Louisiana had opted out of the federal exemption statute of §522(b). The court then analyzed Louisiana exemptions and found that the inherited IRA was not exempt under Louisiana law because the inherited IRA was not a “tax-deferred arrangement” within the meaning of the Louisiana statutes and therefore not exempt from the bankruptcy estate under Louisiana law.
Therefore, the Everett court reversed the lower court’s order denying the objection to taxpayer’s exemption, which will result in the taxpayer losing the inherited IRA to creditors.
PRACTICE POINTERS: Determine whether the taxpayer’s state has opted-out of the federal tax exemptions. If opted-out, then determine the exemption status of inherited IRAs under the state law of taxpayer’s residence. This analysis will help you advise the taxpayer whether the inherited IRA would be protected from the Chapter 7 trustee’s attempt to seize the property or force a turnover of the property.
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