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Inherited IRA Is Exempt from Debtors' Bankruptcy Estate.
(Parker Tax Publishing January 2014)

A couple was entitled to claim an exemption from their bankruptcy estate for an inherited IRA because the issuing annuity insurer received a favorable determination from the IRS that the account satisfied the requirements of Code Sec. 408 and the determination was in effect when the debtors filed their bankruptcy petition. In re Trawick, 2013 PTC 411 (Bankr., C.D. Cal. 12/20/13).

In 2003, an annuity insurance company issued an annuity policy as an individual retirement account (IRA) to Roberta Berry. The IRA was issued by the company pursuant to a favorable determination letter from the IRS approving the prototype annuity contract as meeting the requirements of Code Sec. 408. The determination letter received by the company was never revoked. The IRA was subsequently inherited by Roberta's daughter, Stephanie. In 2012, Stephanie and Jeffrey Trawick filed a Chapter 7 bankruptcy petition and claimed an exemption for the inherited IRA. The bankruptcy trustee filed an objection to the debtors' claim of exemption.

Under Bankruptcy Code Section 522(b)(3)(C), funds are exempt from a bankruptcy estate if they meet the following two requirements: (1) the amount the debtor seeks to exempt are retirement funds; and (2) the retirement funds are in an account that is exempt from tax under the provisions of the Internal Revenue Code.

A bankruptcy court held that the funds in the inherited IRA were exempt from the bankruptcy estate. The court cited Mullen v. Hamlin, 465 B.R. 863 (B.A.P. 9th Cir. 2012), in which the Ninth Circuit held that, if the retirement funds were in a retirement account that received a favorable determination from the IRS and the determination was in effect when the bankruptcy petition was filed, then the funds are presumed to be exempt from the bankruptcy estate. The bankruptcy court noted that the funds in the inherited IRA were retirement funds qualifying for exempt status based on the plain language of Bankruptcy Code Section 522(b)(3)(C). Moreover, the debtors showed that the funds were in a retirement account that had received a favorable determination from the IRS, and the determination was in effect as of the date the debtors filed their bankruptcy petition. Further, the trustee presented no evidence to rebut the presumption of exemption. Accordingly, the court concluded that the funds in the inherited IRA were exempt from the estate, and the trustee's objection to the debtors' claim of exemption was denied.

For a discussion of inherited IRAs, see Parker Tax ΒΆ134,550. (Staff Contributor Parker Tax Publishing)

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Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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