Inherited IRA’s Declared Exempt

March 19, 2012
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Assets in Heir’s Bankruptcy

I have taken an excerpt of a post that was made on our sister blog and have posted it below. It’s a great discussion that ties Tax, Trusts and Estates  with  bankruptcy. Scarinci and Hollenbeck Partner, Joel R. Glucksman author of www.newjerseybankruptcynow.com, explains in his post an interesting first of it’s kind ruling in the circuit court level. “The Fifth Circuit has held that inherited IRA funds are exempt from creditor distribution when the heir receiving those funds later files a bankruptcy.  The ruling legitimizes an important asset planning tool, allowing a wealthy parent to bequeath creditor-exempt assets to a financially troubled child without the fear that the child’s creditors might grab the funds. In Chilton v. Moser (In re Chilton), __ F.3d __ (5th Cir. 2012), the soon-to-be bankrupt Robert Chilton inherited $170,000 of IRA funds from the estate of his mother Shirley Heil.  When he thereafter filed a personal bankruptcy, he sought to keep the IRA funds from distribution to his creditors by using the Bankruptcy Code exemption for retirement funds.  The court agreed with him. To begin with, Bankruptcy Code §541 declares that, upon the commencement of the bankruptcy case, a legal entity known as the “bankruptcy estate” is created.  This is comprised of all of the debtor’s property interests, of all kinds and types, wherever located.  However, Bankruptcy Code §522 also lists a number of asset categories which do not become part of the bankruptcy estate.  Such exempt assets are kept from distribution to the debtor’s creditors.  They are therefore retained by the debtor after the bankruptcy case is over, and the debts are discharged.  Notably, under Bankruptcy Code §522(d)(12), such assets include “retirement funds,” to the extent that they are in a fund or account that is exempt from taxation under the Internal Revenue Code…” For the entire article please visit the Bankruptcy & Creditors’ Rights Blog.