Individual Retirement Accounts have for many years been one the safest ways to protect savings for one’s future retirement from the claims of creditors, especially in Chapter 7 bankruptcy. Mind you, I’m not saying that once funds have been contributed to an IRA, they’re “safe” from the risks inherent in investing or the merciless ravages of a declining market—that’s another matter entirely. But if you ever find yourself in the position of needing to file Chapter 7 bankruptcy in order to discharge debts you cannot afford to pay, then you’ll be very glad indeed that you saved as much as you could in an IRA. 401(k)s in bankruptcy are likewise safe from being seized by a Chapter 7 bankruptcy trustee by virtue of the spendthrift clause contained in the federal statute that created them, so I am not advocating IRAs over 401(k)s in this post, but rather merely covering a recent extension of bankruptcy law protection specific to inherited IRA accounts in Chapter 7 cases.
For many years, however, bankruptcy courts refused to give the same protection to IRA accounts inherited from a non-spouse that IRAs established and funded by a debtor or a debtor’s spouse enjoyed. Even though the 2005 BAPCPA changes to bankruptcy law included new provisions specifically aimed at expanding the protection of IRAs to all IRA accounts—including IRAs inherited from a non-spouse, it has taken until 2012 for the Ninth Circuit BAP to fully recognize this expanded protection in Chapter 7 bankruptcy cases. Since I practice bankruptcy in San Jose, California, the Ninth Circuit’s decisions shape bankruptcy law for my clients.
This past February, the Ninth Circuit Bankruptcy Appellate Panel decided that Chapter 7 debtors who inherit a non-spouse’s IRA account may claim such an account as exempt under Bankruptcy Code Section 523(b)(3)(c), In re Hamlin, 465 BR 863 (9th Cir BAP 2012). As long as the inherited IRA account was transferred to the Chapter 7 bankruptcy debtor in a “trustee-to-trustee” transfer into a new inherited IRA account for the debtor’s benefit, then it is fully exempt from taking by the trustee in Chapter 7 bankruptcy. Such a transfer merely means that the funds cannot have been distributed to the debtor directly, but rather, moved directly into a new inherited IRA account and thus escape taxation and satisfy IRS requirements.
This ruling is great news for our clients who today may need to file personal bankruptcy in the Bay Area, of course. But it is also good news for those who may never need to file bankruptcy because saving in an individual retirement account today may provide additional financial security to a child or grandchild who might inherit your retirement savings—even if that child needs to declare bankruptcy one day.
As bankruptcy attorneys serving Chapter 7 and Chapter 13 clients in San Jose, one of our primary concerns is to protect whatever assets our bankruptcy clients may have to the maximum extent allowed by current bankruptcy law. If you live in the San Francisco Bay Area and have more debt than you can reasonably afford to pay, call us for a free bankruptcy consultation.