Oct 10

Inherited IRA’s: Exempt From Use To Pay Creditors

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In San Marcos California we tend to run into bankruptcy cases, especially Chapter 7 and Chapter 13 cases, involving issues of inheritance on the part of debtors. Our community and the communities surrounding us such as Vista, Escondido, Oceanside, Rancho Bernardo, Carlsbad and others have large populations of seniors who often leave legacies to children or other heirs who have seen hard times as a result of the economy over the last several years.  One of the interesting issues that sometimes comes up has been whether IRA proceeds, inherited from someone else, if placed in a new IRA account rather than taken in cash, are exempt from use by the bankruptcy trustee to pay creditors.  Many trustees across the country have taken the position that IRA proceeds received from a parent’s account are not exempt and have to be turned over to the trustee to be used to pay off creditors. However, a recent case out of the 5th circuit holds that IRA proceeds received from a parent or other person and deposited into another IRA account in the name of the debtor are exempt.  The case in question is In Re Chilton and was decided in March 2012.  It focused its analysis on the language of section 522 of the bankruptcy code to conclude that money set aside by the debtor for retirement are exempt and those funds do not have to have been the debtors money before they were set aside.  This gives debtors a powerful tool to use in bankruptcy planning and a way to help insure they receive a fresh start and maintain a healthy financial status in the future, hopefully avoiding the need for a second bankruptcy if another spate of bad luck is suffered.

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