Monmouth County Bankruptcy and Consumer Lawyer Blog

IRAs started appearing in Americans' Investment portfolios in the 1970's when Congress enacted far-reaching pension and retirement reform measures in the Employee Retirement Income Security Act of 1974 (ERISA) . When preparing a consumer Bankruptcy petition an attorney will generally include traditional IRAs on Schedule B of the bankruptcy petition and protect them by way of exemption on Schedule C of the petition. The circumstance is becoming more common whereby the individual who originated an IRA is not the one filing the bankruptcy. Instead, the filing person is one of the designated beneficiaries who are to receive the balance of IRA account upon the IRA account(s) originator(s) death. Because IRAs have been around since the 1970s it is commonplace that individuals with IRAs die and their IRAs pass to beneficiaries. Inherited IRAs are IRAs that are received by individuals from someone other than their spouses. The good news is that IRA's are exempt in the IRA inheritor's bankruptcy. In the Tabor case the bankruptcy court for the Middle District of Pennsylvania ruled that inherited IRAs are exempt under section 522(b)(3)(C). See, Bierbach v. Tabor (In re Tabor), 2010 Bankr. LEXIS 2051 (Bankr. M.D. Pa. 2010).

In Tabor the IRA in dispute was originated and funded by the Debtor's (person filing bankruptcy) mother, Bernice Simpson. At her death on June 27, 2004, at the age of 79, Mrs. Simpson was the owner of four IRA accounts. Each account named the Debtor and her brother as co-beneficiaries. Following her death, the four accounts were divided between the surviving beneficiaries. The funds being held for Debtor's benefit were transferred by the custodian to an inherited IRA account that listed Debtor as the beneficiary. Between September 15, 2004 and May 3, 2007, Debtor took eleven distributions totaling $132,300 from the account. On the date of the petition, her inherited IRA was valued at $105,102.15. Id.

The Tabor court went on to acknowledge that the Internal Revenue Code treats inherited IRAs differently than it does accounts funded by an individual's own employment earnings in certain respects .Id. at 8. It then noted that BAPCPA expanded the exemption status of IRAs to include any retirement funds held in an account exempt from taxation under specific Internal Revenue Code sections, without reference to whether such funds were necessary for the support of the debtor or the debtor's dependents. Id. at 12. And it further emphasized that as a result of section 522(b)(4)(C): "[t]his increased protection is afforded not only to an IRA account created by the debtor, but also extends to accounts that are transferred directly between trustees (e.g., inherited accounts) and to roll over distributions." Id. at 13. The Tabor court held that the language of section 522(b)(3)(C) unambiguously applies to inherited IRAs, although it also acknowledged that it was unclear whether Congress realized that inherited IRAs were "trustee to trustee" accounts. Id. The Tabor court ultimately held that the funds in an inherited IRA are retirement funds, that an inherited IRA is tax exempt under IRC section 408, and that, as a result, an inherited IRA is exempt under section 522(b)(3)(C). Id. at 17. This means that as long as the IRA is disclosed on schedule B and simultaneously listed on schedule C an inherited IRA may be claimed as exempt under Bankruptcy Code Sec. 522(b)(3).

This decision by the Court enforces the importance of keeping money in a safe place when it comes time to make a decision on the proverbial question: "Where am I going to get the money to pay my bills." It is of note the debtor in the Tabor took over $132,000 out of her protected asset before filing her bankruptcy. It is unknown why she may have taken out these funds or what she spent the money on. What is known is that too many clients that we consult have depleted their protected assets in order to pay down dischargeable debts, before having come in for a free consultation. For example, is she used that $132, 000 to pay down credit card debt and then filed bankruptcy; she loses the ultimate benefit of bankruptcy. She would have been much better off if she had left the money in the inherited IRA account and filed bankruptcy, simply discharging the credit card debt and keeping the $132,000 safe in the IRA (this hypothetical assumes that she would have qualified to file a chapter 7). Ultimately bankruptcy can be planned properly with assistance of experienced counsel here at Riviere Cresci & Singer LLC. Preserve your assets that are protectable in bankruptcy! Your future will thank you.