• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer
  • Home
  • WHO WE ARE
    • About Our Firm
    • Attorney and Staff Profiles
    • News and Events
  • Areas We Serve
    • Essex County, MA
      • Andover
      • North Andover
    • Hillsborough County, NH
      • Manchester
      • Nashua
    • Middlesex County, MA
      • Concord
      • Lexington
      • Wakefield
      • Winchester
      • Woburn
    • Rockingham County, NH
      • Exeter
      • Londonderry
      • Salem
  • Services
    • Asset & Business Planning
    • Elder Law & Medicaid Services
    • Estate And Gift Tax Figures
    • Family-Owned Businesses & Farms
    • Legacy Planning Services
    • LGBTQ Estate Planning
    • Loss Of A Loved One
    • Pet Planning
    • Power Of Attorney
    • Probate and Trust Administration
    • SECURE Act
    • Special Needs Planning
    • Young Families
  • Elder Law
    • Coping with Alzheimer’s
    • Hospice Care
    • Medicaid Planning
    • Nursing Home Planning
  • Resources
    • Elder Law
      • Elder Law & Medicaid Definitions
      • Elder law reports
      • Elder Law Resources
        • Elder Law Resources – Londonderry, New Hampshire
        • Elder Law Resources North Andover, Massachusetts
        • Nashua, New Hampshire Elder Law Resources
        • Woburn, MA Elder Law Resources
    • Estate Planning
      • Estate Planning Articles
      • Estate and Gift Tax Figures
      • Estate Planning Checkup
      • Estate Planning Definitions
      • Estate Planning Reports
        • Advanced Estate Planning
        • Basic Estate Planning
        • Estate Planning for Niches
        • Trust Administration
      • Incapacity Planning Definitions
      • Is Your Estate Plan Outdated?
      • Top 10 Estate and Legacy Planning Techniques
    • Free Estate Planning Worksheet
    • Free Seminars
    • Frequently Asked Questions
      • Asset Protection Planning
      • Business Planning
      • Charitable Gifting
      • Estate Planning
      • Elder Law
      • Frequently Asked Questions for Families Without an Estate Plan
      • Incapacity Planning
      • Legacy Wealth Planning
      • LGBTQ Estate Planning
      • Medicaid Planning
      • Trust Administration & Probate
      • Wills and Trusts
    • Newsletters
    • Pre Consultation Form
    • Presentations
    • Probate and Trust Administration
      • Bereavement Resources
      • How to Know if You Need Extra Help With Your Grieving
      • Loss Of A Loved One
      • Probate Resources
        • Nashua, New Hampshire Probate Resources
        • Probate Resources – Londonderry, New Hampshire
        • Probate Resources – North Andover, MA
        • Probate Resources – Wakefield, Massachusetts
        • Woburn, MA Probate Resources
      • The Mourner’s Bill of Rights
      • Things You Need To Do When a Loved One Passes Away With a Trust
      • Things You Need To Do When a Loved One Passes Away With a Will
      • Trust Administration & Probate Definitions
    • Published Books
  • Live Seminars
    • Online Seminars
    • In-Person Seminars
  • Videos
  • Contact Us
  • Blog
  • Reviews
    • Our Reviews
    • Review Us

DeBruyckere Law Offices, PC

Serving Southern New Hampshire & Essex Country, Massachussetts

Call us today(603) 894-4141

(978) 969-0331

Online Seminars
Attend Free Seminar
Home » Educational-Alerts » Creditor Protection Extended to Inherited IRAs by More Courts

Creditor Protection Extended to Inherited IRAs by More Courts

April 29, 2011

IRAs and Qualified Plans are an increasing portion of our clients’ wealth. The advantages of the income tax deferral are well-known. This month’s Alert looks at developments regarding the creditor protection such plans provide, not only for the contributor, but also for those who inherit them.

The federal government and most states extend creditor protection to IRAs and other retirement accounts. The extent of this protection has been clear with regard to IRAs and other retirement accounts established by the contributing debtor. But, the extent of creditor protection for Inherited IRAs has been less clear. Early court decisions held that protection was not available for debtors with Inherited IRAs, but more and more courts are now holding to the contrary. With this new development, it becomes even more important than ever for clients with significant retirement assets to consult with an estate planning attorney with special knowledge of the federal and state laws dealing with estate and income taxation, retirement plans, and asset protection in order to preserve this important benefit for their family.

In the case In re Mathusa, No. 6:10-bk-13336-KSJ (March 28, 2011) the debtor, Marilynn Mathusa, was designated as the beneficiary of an IRA which had belonged to her deceased mother. Marilyn followed the required formalities to make a trustee-to-trustee transfer of her mother’s IRA into an inherited IRA. When she filed for bankruptcy several years later, she claimed an exemption in the bankruptcy proceedings. The Bankruptcy Trustee argued that an Inherited IRA did not qualify for an exemption under either federal or state law.

The United States District Court for the Middle District of Florida held that the federal exemption statutes provide that a debtor may claim an exemption for retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under Internal Revenue Code sections dealing with retirement accounts. In its opinion, the court focused on the reasoning of the Eighth Circuit in In re Nessa, 426 B.R. 312 (B.A.P. 8th Cir. Apr. 9, 2010). In Nessa, the Court of Appeals concluded that the debtor’s Inherited IRA was exempt under federal law because the assets in an Inherited IRA qualified as “retirement funds” and an Inherited IRA is exempt from taxation under the Internal Revenue Code. The Nessa court further held that federal law does not require the retirement funds to be the debtor’s retirement funds to qualify for exemption. The Mathusa court expressly adopted the reasoning of Nessa. Accordingly, the District Court held that Marilyn’s Inherited IRA was exempt from the claims of her creditors.

Another recent case, In re Thiem, 107 AFTR 2d 2011-529 (Bktcy Ct AZ Jan. 19, 2011), resulted in the United States Bankruptcy Court for the District of Arizona also holding that an Inherited IRA was exempt from the inheritor’s creditors. In that case, Kay Thiem and her sister were named as beneficiaries of their mother’s IRA. Within sixty days of her mother’s death, all of her mother’s IRA was transferred by trustee-to-trustee transfer into an Inherited IRA for the benefit of Kay. Kay took all of her mother’s IRA as an inherited IRA and paid her sister the sister’s share of the IRA using Kay’s own funds.

Five years later, Kay and her husband filed for bankruptcy protection from their creditors. Between the date she transferred her mother’s IRA into her Inherited IRA and the date of her petition for bankruptcy protection, Kay took only the Required Minimum Distributions mandated by federal law from her Inherited IRA. Upon filing for protection from her creditors under bankruptcy laws, Kay claimed an exemption for her Inherited IRA pursuant to the federal Bankruptcy Code and the Arizona exemption for retirement plans under its bankruptcy statutes. The Bankruptcy Trustee objected to the claimed exemption on the grounds that the source of the retirement funds was not Kay, but her mother.

The court indicated that federal and Arizona case law and legislative history did not reveal any useful information regarding the application of the exemption of retirement plan assets by federal and Arizona bankruptcy statutes to an Inherited IRA. The court found that there was no question that the mother’s IRA would have qualified as an exempt IRA under both federal and Arizona law if Kay’s mother had been filing for bankruptcy. The question remaining was whether federal and Arizona law also recognized and extended this asset protection to the IRA once it became an Inherited IRA belonging to Kay.

Because there was no Arizona law on point, the court turned to case law from other jurisdictions. In such jurisdictions, the applicable statutes did not specifically address whether Inherited IRAs were exempt under state law. In reviewing the decisions In re McClelland, 2008 WL 89901 (Bankr. D. Idaho 2008), In re Tabor, 433 B.R. 469 (Bankr. M.D. Pa. 2010), and In re Kuchta, 434 B.R. 837 (Bankr. N.D. Ohio 2010), the Thiem court found the case law in support of an exemption for an Inherited IRA to be convincing. The court disagreed with the courts that denied the exemption stating that even though Inherited IRAs are treated differently under the Internal Revenue Code, they maintain the tax-advantaged attributes of other retirement assets provided for under the Code.

The court held that the plain language of the federal exemption statutes provides that transfers of the type that create an Inherited IRA do not cause a loss of exemption eligibility. In addition, the court did not agree with the cases that required a retirement purpose to obtain exemption because the federal exemption statutes do not require the funds to be those originally belonging to the debtor. See, e.g., In re Chilton, 426 B.R. 612 (Bankr. E.D. Tex. 2010). Instead, the court held that an Inherited IRA that complies with the Internal Revenue Code to be an account that meets the requirements of the Arizona and federal retirement exemption statutes at issue.

There have now been at least a dozen decisions under different state statutes holding that Inherited IRAs are afforded the same asset protection benefits available to IRAs and other retirement plans created and funded with the debtors own funds. Our law firm focuses its practice on estate planning, especially as it relates to large retirement assets and asset protection strategies. As a member of the exclusive nationwide group of estate planning attorneys, the American Academy of Estate Planning Attorneys, we are kept up-to-date on all the new statutes, case law and other developments in the complicated practice areas of estate planning, retirement planning, tax law, and asset protection strategies. You can take advantage of our specialized knowledge by scheduling a free consultation with one of our attorneys for yourself or one of your clients by calling or visiting our website.

DeBruyckere Law Offices, PC

Download our free Estate Planning Worksheet

There's a lot that goes into setting up a comprehensive estate plan, but with our FREE worksheet, you'll be one step closer to getting yourself and your family on the path to a secure and happy future.
  • This field is for validation purposes and should be left unchanged.

Subscribe to Our Newsletter

Please fill out the form below:
  • This field is for validation purposes and should be left unchanged.

Follow Us

  • Facebook
  • Twitter
  • Linkdin
  • Youtube

Testimonials

I felt complete trust and confidence in Dan DeBruyckere and his staff. They have a caring, low-key approach and there is no pressure to add products to the estate plan; rather he makes me aware of changes in the law, etc. I always learn something new to assist me in our planning!

LN

Your seminar was the only seminar we attended without financial advisors wanting to invest our money instead of protecting it! The information this firm provided was easy to understand even though it is a difficult topic. Thank you for all of your help!

HR

We both felt so comfortable in they way our Estate Planning was handled. We felt like someone was watching out for our best interest. Everyone we worked with at the firm was thorough, and explained everything in a way where we could walk away feeling like everything was complete.

RS

A truly great experience all the way through. Felt like we were a part of the family! Thank you.

LW

We could not have picked a more qualified law firm. Everyone that we came in contact with made us feel at ease.

Happy Client

We were very impressed with the statements put forth by Dan at the Seminar. We were impressed even more by their down to earth approach and the efficiency they accomplished it all.

Charles

Londonderry Office

Londonderry Office
One Verani Way
Londonderry, NH 03053
Phone: (603) 894-4141

See Larger Map Get Directions

Nashua Office

Nashua Office
76 Northeastern Boulevard, Unit 31B
Nashua, NH 03062
Phone: (603) 894-4141

See Larger Map Get Directions

North Andover Office

North Andover Office
231 Sutton St, Suite 1B
North Andover, MA 01845
Phone: (978) 686-4645

See Larger Map Get Directions

Woburn Office

Woburn Office
444 Washington Street, Suite 503
Woburn, MA 01801
Phone: (978) 969-0331

See Larger Map Get Directions

By Appointment Only

BEVERLY OFFICE

Beverly Office
900 Cummings Center Suite 204-U
Beverly, MA 01915
Phone: (978) 969-0331

See Larger Map Get Directions

Office Hours

Monday9:00 AM - 5:00 PM
Tuesday9:00 AM - 5:00 PM
Wednesday9:00 AM - 5:00 PM
Thursday9:00 AM - 5:00 PM
Friday9:00 AM - 5:00 PM

Map

dadlawoffices_sidbr_map
  • Advantages of Working With Our Firm
  • About The American Academy
  • Disclaimer
  • Privacy Policy
  • Sitemap
  • Contact Us

Connect with Us

  • Facebook
  • Twitter
  • Linkdin
  • Youtube
footer-logo

© 2021 DeBruyckere Law Offices
All Right Reseved.

Attorney Advertisement

© 2021 American Academy of Estate Planning Attorneys, Inc.