On June 12, the United States Supreme Court in Clark v Rameker resolved the question that has recently split the 5th and 7th Circuits– Are inherited IRAs protected from the beneficiary’s creditors in a bankruptcy proceeding? The Court unanimously held that they are not.
In 2012, the Fifth Circuit ruled in In re Chilton that inherited IRAs constituted retirement funds within the “plain meaning” of §522 of the Bankruptcy Code and were thus exempt from the bankruptcy estate, under § 522(d)(12) (the federal exemptions). See our prior discussion of this case here.
After Chilton, many thought the issue was settled.
The Bankruptcy Court for the Western District of Washington has now joined other states in invalidating transfers to a self-settled trust on a variety of grounds in the latest asset protection self settled trust case, In re Huber, 2012 Bankr. LEXIS 2038 (May 17, 2013).
When the Fifth Circuit, in a case of first impression for that circuit and all of its sister circuit, last year ruled in In re Chilton, 11-40377, 2012 WL 762924 (5th Cir. Mar. 12, 2012) that inherited IRAs constituted retirement funds within the “plain meaning” of §522 of the Bankruptcy Code and were thus exempt from the bankruptcy estate, under § 522(d)(12) (the federal exemptions), many thought the issue was settled.
The general rule is that an IRA is exempt from the claims of creditors. Indeed, the Federal Bankruptcy Code provides in Sections 522(b)(3)(C) and 522(d)(12) that a retirement plan, including an IRA and a Roth IRA, is an exempt asset in bankruptcy. However in Green v. Pershing L.L.C., N.D. Okla., No. 4:12-cv-00296-CVE-FHM, 10/22/12, the U.S. District Court for the Northern District of Oklahoma ruled that the plan sponsor was not liable for turning over Mr. Green’s entire IRA to the IRS in response to the Notice of Levy and demand the IRS served on Pershing L.L.C. (“Pershing”).
Whether post-death creditor protection is available to inherited IRAs under the 2005 Bankruptcy Act has been the subject of a number of cases decided in the last several years. The argument made by bankruptcy trustees is that, on the death of the IRA owner, the IRA ceases to be “retirement funds” as it is not the retirement funds of the beneficiary. Consequently, the bankruptcy trustees argue that the inherited IRA ceases to have the protection afforded to IRAs under the Bankruptcy Code.
In a recent bankruptcy case, Richard Lewiston unsuccessfully attempted to shelter his assets in the Lois and Richard Lewiston Living Trust (the “Trust”) from inclusion in his bankruptcy estate based on the Trust’s spendthrift provision. Here, the bankruptcy court looked to Michigan state law in applying the provisions of the Bankruptcy Code and concluded the Trust property was part of Lewiston’s bankruptcy estate.
Facts about the Trust:
On June 12, the United States Supreme Court in Clark v Rameker resolved the question that has recently split the 5th and 7th Circuits– Are inherited IRAs protected from the beneficiary’s creditors in a bankruptcy proceeding? The Court unanimously held that they are not.
In 2012, the Fifth Circuit ruled in In re Chilton that inherited IRAs constituted retirement funds within the “plain meaning” of §522 of the Bankruptcy Code and were thus exempt from the bankruptcy estate, under § 522(d)(12) (the federal exemptions). See our prior discussion of this case here.
After Chilton, many thought the issue was settled.
When the Fifth Circuit, in a case of first impression for that circuit and all of its sister circuit, last year ruled in In re Chilton, 11-40377, 2012 WL 762924 (5th Cir. Mar. 12, 2012) that inherited IRAs constituted retirement funds within the “plain meaning” of §522 of the Bankruptcy Code and were thus exempt from the bankruptcy estate, under § 522(d)(12) (the federal exemptions), many thought the issue was settled.