In re: Thiem, No. 4:10-bk-19279-JMM (Bankr. D. Ariz., January 19, 2011).
When can inherited retirement accounts be exempt under the Bankruptcy Code? This was the issue recently addressed by an Arizona bankruptcy court.
The debtors in this case, Richard and Kay Thiem, filed a voluntary petition for Chapter 7 bankruptcy. A few years prior to their petition, Kay's mother had died and left her the contents of her Individual Retirement Account, or IRA. She only took out required distributions, so that the balance at the time of bankruptcy was approximately $10,000. Kay claimed that the IRA was exempt on her bankruptcy paperwork. Although it is well-cemented that IRAs are exempt assets, the trustee argued that it became non-exempt once Kay's mother died and left it to Kay. In other words, the trustee claimed that the IRA lost its status once Kay inherited it.
The bankruptcy court disagreed with the trustee, holding that the IRA remained exempt under Arizona law § 33-1126(B). Additionally, the court held that even if the IRA was not exempt under Arizona law, it would have been exempt under federal exemptions § 522(b)(3)(C).
The court reasoned that if the IRA is inherited, and the debtor never contributes funds to or rolls funds out of the inherited account, it appears to meet the requirements of the Internal Revenue Code and the Bankruptcy Code as well as Arizona law. Although such an effect may not have been the intention of Congress and the state of Arizona in creating the exemption, until it specified its intent more clearly, the court believed the debtor's inherited IRA was clearly within the statute.
