The Seventh Circuit Court of Appeals in In re Clark (12-1241) (April 23, 2013) disagreed with the Fifth Circuit case In re Chilton that held Inherited Individual Retirement Accounts are exempt. I wrote about Chilton in an earlier post. The Chilton case was fairly long and relied on highly technical language and definitions from the Internal Revenue Code. The Fifth Circuit held that an inherited IRA contains “retirement funds” within the meaning of §522(d)(12) and can include funds that others had set aside for retirement and are not limited to funds set aside by the debtors. The Seventh Circuit disagreed and made itself clear in an 8 page opinion.
In Clark, the debtor claimed funds held in an inherited IRA as exempt. The Bankruptcy Court (W.D. Wisc.) disallowed the exemption claim on the basis that the inherited IRA did not represent “retirement funds” in the hands of the debtor. The District Court reversed on the basis that the question was “close” and should therefore be decided in favor of the debtor. The Seventh Circuit stated that the case was not close at all and found that the bankruptcy judge got it right. The Court of Appeals stressed the differences between a regular IRA and in inherited IRA. No new contributions can be made to an inherited IRA and it cannot be rolled over or merged with another account. The inherited IRA cannot be used for the beneficiary’s retirement-the funds must be withdrawn in five years in most instances. In short, the Court found that, “an inherited IRA does not represent ‘retirement funds’ in the hands of the current owner…” and that “money constitutes ‘retirement funds’ (a term that the Bankruptcy Code does not define) only when held for the owner’s retirement. “(Page 3). Inherited IRAs are not “savings reserved for use after their owners stop working.” (Page 8).
The issue of inherited IRAs as exempt arises periodically in Mississippi. Although Chilton and Clark construe the federal exemption statute, the same rationales would likely apply under the Mississippi exemption scheme.