Bankruptcy Law Business Law Elder Law Estate Planning

Are Inherited IRAs Exempt Property in California Bankruptcy?

493855361Updated: The bankruptcy court in In re Sherr (Bankr ND Cal, Sept. 27, 2016, No. 16-10283) 2016 Bankr Lexis 3521 has held that the exemption for “retirement funds” applies to inherited IRAs under California law.

The law says that retirement funds are exempt property in bankruptcy, but the Supreme Court has held that this exemption doesn’t apply to inherited IRAs. End of story? Not quite.

The Supreme Court recently affirmed the Seventh Circuit in holding that the exemption for retirement funds in bankruptcy under 11 USC §§522(b)(3)(C) and (d)(12) doesn’t apply to inherited IRAs because they’re not designed to be used for the beneficiary’s retirement. Clark v Rameker (June 12, 2014, No. 13-299) 2014 US Lexis 4166.

This result seems obvious, although a bankruptcy appellate panel came to the opposite conclusion in In re Nessa (BAP 8th Cir 2010) 426 BR 312 and the Fifth Circuit agreed in Chilton v Moser (5th Cir 2012) 674 F3d 486.

In California, however, the Supreme Court decision may not be conclusive.

Like most other states, California has opted out of the federal bankruptcy exemption scheme as provided in 11 USC §522(b)(2). Some states permit the debtor to elect between state and federal exemptions. California resident debtors must use state law exemptions:

  • Under CCP §703.130(a), debtors generally use the regular exemptions from execution of a money judgment.
  • Debtors may elect to use the exemptions in CCP §703.130(b) in lieu of the regular exemptions.
  • Under CCP §704.115, private retirement benefits are exempt from execution.

Even though a California bankruptcy court would most likely follow Clark v Rameker in the absence of contrary authority, California courts could still decide that the state law exemption applies to inherited IRAs.

To be on the safe side and assuming that California courts will take the Supreme Court’s approach, counsel should advise their clients to name someone who doesn’t have creditor issues as the designated beneficiary of an IRA or retirement plan. Otherwise, those retirement funds might only benefit someone else’s creditors.

For more on retirement plans as exempt assets, turn to CEB’s California Estate Planning §§26.39-26.40. Also check out CEB’s Debt Collection Practice in California §§9.75-9.81.

Other CEBblog posts you may find useful:

© The Regents of the University of California, 2014. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited.

2 replies on “Are Inherited IRAs Exempt Property in California Bankruptcy?”

Add your comment to the blog post

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s