Inherited IRA Excluded From Bankruptcy Estate
Five months before debtor filed Chapter 7 bankruptcy petition, debtor’s stepmother died, leaving an IRA naming debtor as beneficiary. Because the inherited IRA was a qualifying trust, it should not have been included in the bankruptcy estate.
In her schedules, which she amended twice, debtor asserted both exemption and an exclusion from her estate of her interests in pension funds including the inherited IRA. The Chapter 7 Trustee objected to both assertions and requested a ruling that the inherited IRA constituted property of the estate, which was not properly exempted.
The Bankruptcy code stated that a restriction on the transfer of a beneficial interest of the debtor in a trust that was enforceable under the applicable bankruptcy law was enforceable in a case under the Bankruptcy Code Section 541(a)(2) directed each court to apply applicable nonbankruptcy law of its state. The applicable nonbankruptcy law here was N.J.S.A. 25-2-1(b) which stated that a “qualifying trust” was exempt. A qualifying trust meant a trust created or qualified and maintained pursuant to federal law. The Third Circuit has held the statute operated to exclude IRAs from bankruptcy estate.
The statute required that an inherited IRA be qualified and maintained under section 408 of the Internal Revenue Code. The cases cited by the Trustee focused on whether an inherited IRA may be exempted in the bankruptcy, not whether the asset constituted property of estate in the first place. The trustee failed to demonstrate that the inherited IRA did not comply with section 408; she did not cite any part of section 408 that disqualifies an inherited IRA trust status. Section 408 recognized circumstances in which an IRA can be treated as “inherited”. It did not provide that an IRA once inherited, was no longer a trust. The IRC did not state that an IRA, once inherited was no longer an IRA. Section 408(d)(3), the only subsection of 408 address inherited IRAs, only denied rollover treatment for those accounts.
The inherited IRA constituted a qualifying trust under N.J.S.A. 25-2-1(b) and was therefore excluded form debtor’s bankruptcy estate. The trustee’s objection was denied.
Reference: In Re: Norris, NO. 15-26458, Bankruptcy, May 20, 2016, Case & Analysis, New Jersey Law Journal, 222 N.J.L.J. 1896 (June 13, 2016)
Filed Under: Inherited IRA; Bankruptcy Estate
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