21 May 2011
There is no definite answer to this question, as the law is in a state of flux. So the answer is, maybe, maybe not. An initial suggestion for one who will file for bankruptcy and has an inherited IRA is to make sure that your lawyer (and you should have a lawyer) has an articulated approach to the issue in mind. If not, you may not want to file, or you may want to get another lawyer. Typically, an inherited IRA is a significant asset to the holder’s balance sheet and thus is a major consideration prior to filing bankruptcy. Here are some particulars.
Legally, an inherited IRA is one that has been received from an individual who was not a former spouse. 26 U.S.C. § 408(d)(3)(C)(ii). The tax code treats an inherited IRA differently, and arguably it may be a different legal creature for bankruptcy purposes than when the IRA was held by the original holder. It is this type of “inherited IRA” that is in controversy. The legal question is whether the inherited IRA is exempt when the beneficiary (now the person contemplating bankruptcy) owns the account due to the original owner’s demise. Specifically, the dispute usually involves the correct interpretation of 11 U.S. C. § 522(d)(12) which allows a debtor to exempt “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section . . . 408 . . . of the Internal Revenue Code.” The question raises many issues, but the main controversy is whether the inherited IRA should be considered “retirement funds” per § 522(d)(12). Compare In re Nessa, 426 B.R. 312 (B.A.P. 8th Cir 2010) (inherited IRA exempt) with In re Ard, 435 B.R. 719 (M.D. Fla. 2010) (inherited IRA not exempt) and In re Chilton, 426 B.R. 612 (Bankr. E.D. Tex. 2010) (same).
In closing, many people think that the law is black and white. But when two arguably reasonably supported judge’s interpretations differ then some gray is added to the mix. If you want to file for bankruptcy and have an inherited IRA, you should really trust your lawyer and be comfortable with accepting the range of possible outcomes. If you think that this office can be of help to you, feel free to give us a call.
Showing posts with label keep IRA bankruptcy. Show all posts
Showing posts with label keep IRA bankruptcy. Show all posts
Saturday, May 21, 2011
Thursday, April 21, 2011
Can I keep my IRA if I file for bankruptcy?
21 April 2011
The answer is: most likely. The exemption scheme you choose is important. To understand the basics of what is happening with respect to assets when someone files for bankruptcy, please read the blog posted on 15 April 2011. Now that you have the introduction, we can take it to another level.
Protecting an IRA is important, as your future retirement may be at stake. Careful thought is needed. As stated in the other posting, both Massachusetts and Connecticut allow their residents to choose between: 1) bankruptcy exemptions; and 2) state exemptions and federal non-bankruptcy exemptions. In Massachusetts, state exemptions only protect IRA’s to the extent the funds are reasonably necessary for the support of the debtor or his dependents. One might be inclined to think that a substantial IRA fund would be in jeopardy under a chapter 7 filing; However, the code needs to be read carefully. In In re Euse, a recent case in Nebraska, a bankruptcy court noted that the law allowed debtors choosing the state exemption scheme to also enjoy protection of their IRA in full. No. BK10-43179-TLS, 2011 WL 294143 (Bkrtcy. D. Neb. Mar. 2, 2011). The In re Euse court observed that the bankruptcy code permitted a debtor to choose state exemptions, and had an additional provision allowing the exemption of “retirement funds to the extent those funds are exempt from taxation under specified provisions of the Internal Revenue Code.” It based this decision on an addition to the bankruptcy code made under Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 codified at 11 U.S.C. § 522(b)(3). It found this provision encompassed IRAs. In that case, the debtor was entitled to keep his entire $163K IRA.
Before you decide to make your own decision on how to apply exemptions in bankruptcy, take heed of some points. Understand that many bankruptcy decisions, including In re Euse, is not binding upon any other court. And although the court based its decision on a part of the bankruptcy code that applies whenever state exemptions are chosen, each person has a unique set of assets, financial situation, and considerations when filing bankruptcy. (The snake you are watching might not bite you, but the one you do not see might.) One should seek qualified counsel before making the decision to file for bankruptcy.
The answer is: most likely. The exemption scheme you choose is important. To understand the basics of what is happening with respect to assets when someone files for bankruptcy, please read the blog posted on 15 April 2011. Now that you have the introduction, we can take it to another level.
Protecting an IRA is important, as your future retirement may be at stake. Careful thought is needed. As stated in the other posting, both Massachusetts and Connecticut allow their residents to choose between: 1) bankruptcy exemptions; and 2) state exemptions and federal non-bankruptcy exemptions. In Massachusetts, state exemptions only protect IRA’s to the extent the funds are reasonably necessary for the support of the debtor or his dependents. One might be inclined to think that a substantial IRA fund would be in jeopardy under a chapter 7 filing; However, the code needs to be read carefully. In In re Euse, a recent case in Nebraska, a bankruptcy court noted that the law allowed debtors choosing the state exemption scheme to also enjoy protection of their IRA in full. No. BK10-43179-TLS, 2011 WL 294143 (Bkrtcy. D. Neb. Mar. 2, 2011). The In re Euse court observed that the bankruptcy code permitted a debtor to choose state exemptions, and had an additional provision allowing the exemption of “retirement funds to the extent those funds are exempt from taxation under specified provisions of the Internal Revenue Code.” It based this decision on an addition to the bankruptcy code made under Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 codified at 11 U.S.C. § 522(b)(3). It found this provision encompassed IRAs. In that case, the debtor was entitled to keep his entire $163K IRA.
Before you decide to make your own decision on how to apply exemptions in bankruptcy, take heed of some points. Understand that many bankruptcy decisions, including In re Euse, is not binding upon any other court. And although the court based its decision on a part of the bankruptcy code that applies whenever state exemptions are chosen, each person has a unique set of assets, financial situation, and considerations when filing bankruptcy. (The snake you are watching might not bite you, but the one you do not see might.) One should seek qualified counsel before making the decision to file for bankruptcy.
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