- Case Nos. 12-1241 and 12-1255, 7th Cir. Court of Appeals (decided April 23, 2013)
- Reversing the district court, the 7th Circuit panel agreed with the bankruptcy court (450 B.R. 858 (Bankr. W.D. Wis. 2011)) that IRA "retirement funds" lose their character once they are inherited, even if they remain in the same account and retain tax deferred attributes. The court considered whether the funds in a IRA account that was inherited by a debtor from a parent were exempt as "retirement funds" under 11 U.S.C. §§ 522(b)(3)(C) and (d)(12). The panel noted that an inherited IRA was materially different than a personal IRA, because under the Internal Revenue Code, an inherited IRA must begin distributing assets within a year of the original owner's death and must be withdrawn entirely in as little as five years; the funds cannot be held in the account until the current owner's retirement. The forced withdrawal changes the character of the funds, such that they are no different than other cash assets that may be available to fund creditor payments once converted from funds held in the inherited IRA to cash in the debtor's account. This is true even though the funds retain their tax deferred status until the moment of withdrawal. In sum, once inherited, the account remains a tax deferred vehicle but the funds themselves are no longer "retirement funds" exempt from creditors under § 522. The 7th Circuit disagreed with recent rulings by the 5th Circuit (In re Chilton, 674 F.3d 486 (5th Cir. 2012)) and 8th Circuit BAP (In re Nessa, 426 B.R. 312 (BAP 8th Cir. 2010). Noting the split with the 5th Circuit, the panel circulated the opinion before release to all 7th Circuit judges in active service, but none requested a hearing en banc.
- Procedural context:
- Appeals from the United States District Court for the Western District of Wisconsin. Case No. 11-cv-482-bbc (Barbara B. Crabb, Judge).
- Ruth Heffron left an IRA holding approximately $300,000 to her designated beneficiary, daughter Heidi Heffron-Clark. Heidi and her husband Brandon initiated a bankruptcy proceeding and declared the IRA exempt under 11 U.S.C. §§ 522(b)(3)(C) and (d)(12). The trustee, William Rameker, objected to the exemptions. Bankruptcy Judge Robert D. Martin agreed with the trustee, and the Clarks appealed. The district court reversed, and the trustee appealed.
- Frank Easterbrook, Chief Judge; Joel Flaum, Circuit Judge; Ann Williams, Circuit Judge.
3043 in the system
4 Being Processed