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Inherited IRAs can be exempted under § 522(d)(12)

The Eastern District of Michigan Bankruptcy Court recently held that a debtor can exempt an inherited IRA under 11 U.S.C. § 522(d)(12).

The Eastern District Bankruptcy Court denied the Trustee's objection to an exemption claimed pursuant to § 522(d)(12) by a debtor in IRAs that she had inherited from her father.  The Court further rejected the Trustee's argument that inherited IRA funds cannot be considered "retirement funds" under § 522(d)(12) because the funds were not contributed to the IRA by the debtor.  Rather, the Court adopted the debtor's reasoning that the explicit language of § 522(d)(12) does not make a distinction between "inherited IRAs" and IRAs to which the debtor made the contributions.

The Court noted that the only two requirements of § 522(d)(12) are:

  1. the funds the debtor seeks to exempt are retirement funds; and
  2. those funds are tax exempt under certain provisions of the Internal Revenue Code. 

The Court recognized that currently there is no controlling authority in the Sixth Circuit as to whether an inherited IRA can be exempted under § 522(d)(12).  The Court cited Chilton v. Moser (In re Chilton), 444 BR 548 (E.D. Tex. 2011), as being the only court that considered the question of whether an inherited IRA can be exempted under § 522(d)(12).

The Court adopted the reasoning set forth in Chilton and held that the language of § 522(d)(12) does not make a distinction as to who contributed the funds to an IRA, and therefore, the inherited IRA can be exempted under § 522(d)(12).  The Court noted that to hold otherwise would be reading meaning into § 522(d)(12) that is not there.

In short, debtors' counsel and trustees must be aware that a debtor in the Eastern District of Michigan probably has the right to exempt inherited IRAs, regardless of whether the debtor contributed the funds to the IRA.  The Western District of Michigan has not issued an opinion on this issue.

If you have any questions about the exemption of inherited IRAs, please give me a call or send me an email using the form below.

Categories: 6th Circuit Court of Appeals, Eastern District of Michigan

Photo of Patricia J. Scott

 concentrates her practice in the areas of Bankruptcy, Finance, Collections, Real Estate, and Commercial Litigation. In the bankruptcy area she represents creditors and Chapter 7 Trustees in all aspects of bankruptcy. Patricia also represents small and mid-sized businesses to large corporations in multi-faceted litigation matters in state and federal court. Her work with financial institutions includes collections, loan workouts, foreclosures, receiverships and various complex banking and finance issues. 

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