Inherited IRA Exempt in Bankruptcy

It was previously held in In re Clark that inherited individual retirements accounts (IRA’s) were not exempt under bankruptcy laws. In that particular case an IRA was established by Debtors mother and was later inherited by Debtor. When Debtor filed bankruptcy Debtor claimed the IRA as exempt and the Chapter 7 trustee objected. The court granted trustee objection and the Debtor later objected.

                On appeal the district court began looking at exemptions of a traditional IRA including an IRA inherited by Debtor’s spouse. When a spouse inherits an IRA the spouse can contribute to the I
RA and the use of the IRA is subject to the same restrictions as were placed on the deceased spouse. However, a beneficiary on an inherited IRA cannot make contributions and make be required to take funds prior to retirement age. These led the bankruptcy court to believe that the inherited IRA was of nonexempt status.

                The district court however found that a majority of courts held that inherited IRA’s were in fact exempt assets of the bankruptcy based on the idea that once funds reach the status of retirement funds that the funds do not lose that characterization and protection simply because they were inherited by a Debtor. They held that the funds must be retirement funds, but are not required to be Debtor’s retirement funds.