7th Circuit-Inherited IRA Not Exempt-Circuit Split

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  The inherited IRA cannot be used for the beneficiary’s retirement-the funds must be withdrawn in five years in most instances.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.

Increases in Federal Exemptions and More!

The Judicial Conference increased certain dollar amount limitations found in the Bankruptcy Code effective for cases filed on or after April 1, 2013.  Debtors’ attorneys, don’t forget to update your software.  You may review all of the increases in the Federal Register here.  For example, the Chapter 13 debt limitation has been increased to $383,175.00 for noncontingent, liquidated, unsecured debt and increased to $1,149,525.00 for noncontingent, liquidated, secured debt.   Additionally, the federal residency exemption (homestead exemption) has been increased to $22,975.00, the federal motor vehicle exemption has been increased to $3,675.00, and the federal wildcard exemption has been increased to $1,225.00, plus up to $11,500.00 of unused residency exemption.   All other federal exemptions expressed in dollar amounts have also been increased.

In addition to the increased amounts in the Bankruptcy Code, the median incomes used in the means test have been adjusted for all states.   Mississippi’s median income for a single member household is now $36,240.00.  View all of the changes here.

Hey wait! Why would a Mississippi lawyer care about federal exemptions? Stay tuned.

Debtor FAQ – Can I Keep My Stuff?

free stuff

A debtor entitled to Mississippi exemptions may retain certain tangible personal property, not to exceed $10,000.00 in cumulative value:

1. HOUSEHOLD GOODS. “Household goods” includes clothing, furniture, appliances, one (1) radio, one (1) television, one (1) firearm, one (1) lawn mower, linens, china, crockery, kitchenware and personal effects (including wedding rings) of the debtor or dependents; however, works of art and items acquired as antiques are not “household goods.”

Personal observation: I wonder if anyone owns a “radio” these days. If so, what is it worth? Could you give it away? Maybe the TuneIn Radio or Pandora App converts an iPhone or computer into a radio. Let’s hope so, because under Mississippi law a computer may not be exempt.  Also, the term “crockery” did not evoke a clear image in my mind, so I queried an online dictionary and found that I was not alone in my ignorance. Another web dictionary user felt the need to comment on the definition:

[M]y roommate’s doing her homework and we wanted to know if a mug counted as crockery. I didn’t even know this was a word, but I plan on using it whenever I see a hideous china set: “What is this crockery?”

Now the word “crockery” brings to mind dishes my grandmother got with Green Stamps or pulled from a box of laundry detergent.




5. MOTOR VEHICLES. The Mississippi exemption statute does not define a “motor vehicle.” Certainly cars and trucks you see traveling on roads are included.  The Northern District Bankruptcy Court (Hon. Neil P. Olack) examined the definition of motor vehicle under other Mississippi statutory provisions, including Miss. Code Ann. §63-3-103 (Motor Vehicle and Traffic Regulation-Definitions), Miss. Code Ann. §27-19-3 (Motor Vehicle Privilege Taxes-Definitions) and Miss. Code Ann. §27-19-56 (License Plates) and found that a motorcycle is a “motor vehicle” under the Mississippi exemption scheme. In re Clemons, 441 B.R. 519 (Bankr. N.D. Miss. 2010).   The broadest interpretation of “motor vehicle” is predictably found in Miss. Code Ann. §27-19-3, which includes all vehicles subject to privilege tax. Under this broad definition, hauling trailers, including boat trailers, are “motor vehicles.”   “Electric personal assistance mobility devices” are specifically excluded.


Personal observation: I don’t know what this means.


Personal observation: I cannot conceive of a profession or job for which a basic computer would not be a “tool of the trade.”

8. CASH ON HAND.   What is cash on hand?



Personal observation: I’ve been a trustee for almost 10 years and I have seen debtors arrive at §341 meetings in wheel chairs and I have observed debtors with prosthetic limbs and portable oxygen machines, but I have never reviewed a set of schedules that included those items as assets on Schedule B. Even so, I have never raised the issue.   A “professionally prescribed health aid” seems more like an extension of the person than a separate “asset” with value apart from the person.




New Exemption 8-31 dropbox copy 2.018


Inherited IRA’s are Exempt [UPDATE – JUNE 12, 2014 -THIS CASE WAS OVERRULED]


The Fifth Circuit has ruled that an inherited Individual Retirement Account (“IRA”) is exempt under the federal exemption scheme (§522(d)(12)).  In re: Chilton, 774 F.3d 486 (5th Cir. 2012).  Janice Chilton inherited an IRA worth $170,000.00 from her mother and followed the requirements of the Internal Revenue Code to establish an “inherited IRA.” An IRA inherited by someone other than a spouse in defined as an Inherited IRA. 26 U.S.C. §408(d)(3)(C)(ii).  Special distribution rules apply to inherited IRA’s.

Subsequently, the Chiltons filed a Chapter 7 bankruptcy case and claimed the inherited IRA as exempt pursuant to 11 U.S.C. §522(d), which provides:

[t]he following property may be exempted under subsection (b)(2) of this section:… (12) Retirement funds to the extent that those funds are in an account that is exempt from taxation under 401, 403, 408, 408A, 414, 457, or 510(a) of the Internal Revenue Code of 1986.

The Trustee objected to the claimed exemption on the basis that the funds in an inherited IRA are not “retirement funds” within the meaning of §522(d)(12) and are not held in the type of tax exempt account specified.  In response, the debtors converted their case to a Chapter 13 case and the Trustee objected again. The bankruptcy court ruled for the Trustee, but the District Court reversed the decision.  The Trustee appealed.

In a case of first impression at the Circuit Court level, the 5th Circuit ruled that the term “retirement funds” within the meaning of §522(d)(12) can include funds that others had set aside for retirement and are not limited to funds set aside by the debtors. Relying on language in the Internal Revenue Code, the Court further ruled that an inherited IRA is tax exempt under one of the tax code provisions listed in §522(d)(12).  Inherited IRA’s are exempt under the federal exemption scheme of §522(d).

The Chilton opinion was based upon specific statutory language found in §522(d)(12), which is not available to debtors in opt out states like Mississippi.  Would the same analysis apply to inherited IRA’s under Mississippi’s exemption statute? Probably.  But it is unnecessary to consider the question because 11 U.S.C §522(b)(3)(C) allows debtors in opt out states to claim IRA’s as exempt using language identical to §522(d)(12). See In re: Hamlin, 465 B.R. 863 (BAP 9th Cir. 2012) (Inherited IRA’s are exempt under §522(b)(3)(C)).

Caution: in order to qualify as an inherited IRA under ERISA, a trust-to trust transfer must be made and other distribution rules must be followed.  A debtor risks losing the exemption in an inherited IRA if formalities are ignored.

“100% of FMV” post Schwab

In Schwab v. Reilly, ___U.S.___, 130 S. Ct. 2652 (2010), the debtor claimed certain restaurant equipment as exempt as tools of the trade using federal exemptions.  The exemption was expressed in a dollar amount equal to the fair market value of the equipment as listed on Schedule B.  The trustee did not object to the exemption, and after the 30 day deadline to object had passed, the trustee filed a motion to sell the equipment. The debtor objected to the motion to sell arguing that the equipment was removed from the bankruptcy estate when the trustee did not timely object to the exemption.

The trustee argued that it was the monetary amount that the debtor claimed as exempt, not the asset “in kind.”   The Court ruled that if the asset claimed as exempt was properly claimed (the asset type was allowed to be claimed as exempt) in a certain dollar amount, then the trustee could sell the asset and turn over the exempt proceeds without filing an objection to the claimed exemption.  It was the monetary value that was exempt, not the asset itself.

Recently, In re Orton, 687 F.3d 612 (3rd Cir. 2012), considered facts similar to Schwab and confirmed that statutory exemptions that are expressed in dollar terms must be claimed in dollars. The opinion states:

[T]he quintessential purpose of limiting a debtor to a dollar-amount exemption is to permit the trustee to liquidate assets in the best interest of the creditors by cashing out the debtor, effectively removing him from considerations about how to administer the estate. See 11 U.S.C. § 704(a)(1) (“[The Trustee must] collect and reduce to money the property of the estate for which such trustee serves, and close such estate as expeditiously as is compatible with the best interests of the parties…”).

Id. at 619.

The Court also confirmed that the estate is entitled to any appreciation in asset value over the amount claimed as exempt. Id. (citing In re Reed, 940 F.2d 1317 (9th Cir. 1991); In re Paolella, 85 B.R. 974 (Bankr. E.D. Pa. 1988)). The Court relied on the language of §541(a)(6) which defines bankruptcy estate property to include any ‘“[p]roceeds, products, offspring, rents, or profits of or from property of the estate..’ in other words, appreciation of value…”  Id.

Language in Schwab suggests that if a debtor wants to indicate his intent to exempt the asset “in kind,” then he should use specific language that was not expressed in dollar terms, such as “100% of FMV.”  Most courts interpreting Schwab have not allowed debtors to convert the monetary exemptions to “in kind” exemptions by using language such as “100% of FMV.”

In re Salazar, 449 B.R. 890 (Bankr. N.D. Tex 2011) was a consolidated decision involving objections to exemptions in nine (9) separate Chapter 7 and Chapter 13 cases.  In each case, debtors had claimed property as exempt using the language “100% of FMV.”  The debtors had followed the purported directive of Schwab and put the trustees on notice that they intended to claim the asset as exempt “in kind.”  The Court ruled that an objection by the trustee to the language “100 of FMV” could be sustained without an evidentiary hearing in cases in which an exemption should be expressed in terms of dollars.  The bankruptcy estate is entitled to post petition appreciation in asset values.  Therefore, if an exemption is expressed in terms of dollars, then the exemption must be claimed in dollar amounts.  The use of terms such as “100% of FMV” is an attempt to claim post petition appreciation, and is facially invalid. Id.       The Courts in In re Massey, 465 B.R. 720 (B.A.P. 1st Cir. 2012) and In re Luckham,  464 B.R. 67 (Bankr. D. Mass. 2012) have also held that an evidentiary hearing is not necessary on an objection to exemptions when a debtor claims “100% of FMV” of an asset as exempt on the basis that it a facially invalid attempt to exempt post-petition appreciation in property values.

The Bankruptcy Court for the North District of Texas, Forth Worth Division, holds evidentiary valuation hearings on objections to exemptions claiming “100% of FMV.”  The Court ruled in In re Moore, 442 B.R. 865 (Bankr. N.D. Tex. 2010), that  “[t]he debtor will have the burden of going forward and must show a plausible basis for the claim that “100% of FMV” falls within the statutory limit on the amount that may be exempted.  Once the debtor has satisfied that burden, the party opposing the exemption will have, as provided by Rule 4003(c), the burden of proving that, in fact, the exemption exceeds the statutory limit.” Id. at 866.

To the best of my knowledge, the issue has not been raised in Mississippi.  A few attorneys in Mississippi have started using the  “100% of FMV” language.  I have not objected to any of the exemptions because I did not intend to administer the assets claimed as exempt, but I may do so in the future.

What is “Cash on Hand”?

Under Miss. Code Ann. §85-3-1, debtors may claim as exempt certain tangible personal property not to exceed $10,000.00 in equity value.  “Cash on Hand” is specifically included as a category of property that may be claimed as exempt subject to the $10,000.00 limitation.



Bank Accounts are not CASH ON HAND! Cartwright v. Deposit Guaranty Nat. Bank, 675 So. 2d 847 (Miss. 1996).

Does that mean that funds in a bank account can NEVER be exempt? No.  With proper planning, the following may be claimed as exempt if the funds are in a bank account:

-Traceable proceeds from the sale of a homestead.  Miss. Code Ann.§85-3-1(b)(i).

-Traceable proceeds of insurance on exempt property.   Miss. Code Ann.§85-3-1(b)(i).

-Traceable income from an exempt source. (i.e., Social Security Benefits, Workers’ Compensation Benefits, Public Assistance Benefits).

-Wildcard exemption for debtors 70 and older Miss. Code Ann. §85-3-1(h).