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Court Challenges Exemption of Inherited IRAs
Most people, including myself, understood that all IRAs were exempt from creditors outside of bankruptcy and were exempt from the bankruptcy estate for debtors who filed bankruptcy. I received an email from attorney Tye Klooster about an Illinois bankruptcy case which holds that some IRAs are not exempt. If followed in Florida courts this ruling would diminish IRA protection for Florida residents.
Illinois, like Florida, has state statutes which exempt IRAs from creditor collection process. The Illinois statute and the Florida statute protect IRAs that are “exempt from taxation” under Section 408 of the Internal Revenue Code. This Illinois bankruptcy judge said that IRAs which a beneficiary inherits after the death of the owner are not exempt from taxation because the inherited beneficiary is not able to make tax deferred contributions to the IRA and cannot roll over the IRA tax free to a subsequent beneficiary. The judge concluded that inherited IRAs are not within the class of IRAs protected by the Illinois statute or the bankruptcy law.
If this reasoning is followed by Florida courts it could significantly impact asset protection planning for Florida residents in or out of bankruptcy.
The case is In re Taylor, decided May 9, 2006, in the central district of Illinois. Bankruptcy Case No. 05-93559
posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida
October 31, 2006 in Court Decisions | Permalink
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Comments
Has there been any Florida case law that provides Roth IRAs are not protected assets?
Posted by: Ryan Pinder | Mar 30, 2007 12:49:40 PM
This judge is nuts. The "exempt from taxation" line refers to how the IRAs income is taxed, not how IRA contributions are taxed. An IRA is no longer tax-exempt if it has been invalidated by the owner's misdeeds (self-dealing, dealing with prohibited parties). Moreover, if inability to make tax-deferred contributions makes IRAs attachable by creditors, then Roth IRAs are fair game, which the authors of that law cannot have intended.
Posted by: Bob Smith | Nov 3, 2006 12:34:31 PM
Clearly a bad decision. IRAs, including inherited IRAs are EXEMPT under Section 408. The rules for whether contributions to IRAs are DEDUCTIBLE are contained in Section 219. Under the court's reasoning, the IRAs of some taxpayers would not be exempt because they are not eligible to make deductible contributions to their IRAs (because of too much or too little earned income or because they participate in the qualified plan of their employer).
Posted by: Paul Roman | Nov 2, 2006 4:41:41 PM
