Property you own is included in your bankruptcy estate unless your Woodlands Bankruptcy Attorney manages to find a legal basis for exempting it. One of the common exemptions people take advantage of is the exemption for retirement accounts. Unfortunately, this exemption is not without limits and a recent case reminds us of the boundaries of this bankruptcy exemption within the federal bankruptcy exemption rules.

Janice Chilton, a debtor in a bankruptcy case, claimed the IRA she inherited from her mother is exempt under §522(d)(12). The discussion that follows is limited to the federal exemption for retirement accounts and not the Texas exemption.

Section 522(d)(12) of the Bankruptcy Code allows your Woodlands Bankruptcy Lawyer to exempt “[r]etirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457 or 501(a) of the Internal Revenue Code of 1986.” In order to determine whether funds are exempt under §522(d)(12), the Court must engage in a two-part test. First, the Court must determine whether the funds are “retirement funds.” Second, if the funds are retirement funds, the Court must determine whether the funds are exempt from taxation under the applicable provisions of the Internal Revenue Code.

The Retirement Funds Test

Janice Chilton’s bankruptcy attorney argued to the Court that the funds in the inherited IRA are clearly retirement funds since they are in a retirement account. The court in this case stressed that adopting that interpretation of “retirement funds” would be much broader than intended by Congress and would in fact exempt any property in a retirement account and not just “retirement funds.”

The Court looked to the whole statutory text and all the words of §522(d)(12) in determining the plain meaning of “retirement funds.” It found Congress repeatedly used the word “retirement” in §522 to qualify the types of funds and accounts that may be exempted from the bankruptcy estate. Although the Bankruptcy Code does not define “retirement,” the term is generally understood as “withdrawal from one’s position or occupation or from active working life.” The Court concluded that, viewing the words “retirement funds” in their entire context, they cannot reasonably be understood to authorize an exemption of an inherited IRA. The funds contained in an inherited IRA are not funds intended for retirement purposes but, instead, are distributed to the beneficiary of the account without regard to age or retirement status.

The Exempt from Taxation Test

Even though the Court found an inherited IRA did not pass the “retirement funds” test, it went on to consider the “exempt from taxation” test in this case.

Janice Chilton’s bankruptcy attorney argued that the inherited IRA is an eligible rollover under Internal Revenue Code §402(c)(11) and, therefore, is exempt from taxation under §408(e)(1).

The Court ruled an inherited IRA, which is a vehicle for receiving distribution from a tax exempt account, does not fit within the definitional scope of §408(e)(1) and as a result that section cannot be used to claim a bankruptcy exemption.

The court completed its analysis by noting inherited IRAs are controlled by Section 402(c)(11) of the Internal Revenue Code. The tax status of an inherited IRA controlled by Section 402 is not a recognized basis for exempting the account under Section 522(d)(12) of the Bankruptcy Code.

Get Help

The Shea Law Firm is here to help you get through the bankruptcy process and protect your rights to the fullest extent. Don’t risk losing property you may be able to keep. Call (832) 592-7913 and speak with a Woodlands bankruptcy lawyer today.

LoneStarBankruptcy.com provides the latest news and information on Chapter 7 and Chapter 13 bankruptcy in the Southern District of Texas. The Federal Bankruptcy Court for the Southern District of Texas covers many communities including: Houston, Spring, Conroe, The Woodlands, Montgomery County, and Harris County. If you need legal assistance with a personal bankruptcy matter speak with a Woodlands Bankruptcy Attorney today at (832) 592-7913.

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