COURT TEES UP CASE FOR SCOTUS RE: INHERITED IRAS IN BANKRUPTCY (PART 2)

By Gilman & Edwards
11.05.13
11:52 PM
<< Blog

We are continuing our discussion of a case that could change the way families write their estate plans and deal with their retirement funds. The parties to the lawsuit are not from Maryland, and the bankruptcy has nothing to do with Maryland, but there are a few important reasons for us to talk about the decision.

Maryland courts cannot cite the decision as precedent, but, because the state and the 4th U.S. Circuit Court of Appeals have not addressed the central issue, the decision could be cited as “persuasive” case law. (Federal cases heard in Maryland are appealed to the 4th Circuit.) And, of course, if the case is appealed to the Supreme Court, that decision will govern the courts in every state.

When we left off in our last post, the 7th Circuit had determined that a woman declaring personal bankruptcy could not shield the funds in an inherited IRA from creditors. The money had come from her mother, and the balance would have come close to wiping out her and her husband’s debts. They had argued that the bankruptcy exemption for retirement funds included this inherited fund.

The court found that the funds did not qualify as retirement funds because the woman did not have the same control over them that she had over her own retirement savings. Distributions from the inherited IRA had to begin within a year of her mother’s death and had to wrap up within 5 years. The money could not be held in place for the woman’s own retirement; the tax code would not allow it.

The decision, however, contradicts decisions in similar matters from two other circuits. We’ll discuss those in our next post.

Source: Thomson Reuters News & Insight, “In circuit split, court says inherited IRA fair game in bankruptcy,” Nick Brown, April 24, 2013

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