Florida Bankruptcy and Inherited IRAs

Filing bankruptcy in Florida doesn’t mean you have to lose your IRA savings. IRAs (short for Individual Retirement Accounts) are exempt from the liquidation process of a Chapter 7 bankruptcy.  This means you can keep the full value of any IRA account when you file for bankruptcy. IRAs, as well as other forms of retirement savings, such as 401(k) accounts, are considered exempt property under Florida and federal law.  The idea is that a debtor’s retirement savings should not be sacrificed when a “fresh start” is needed.

However, for some bankruptcy courts, inherited IRAs are an exception to this rule. Inherited IRAs are accounts that are created when the a person dies with a balance in their IRA, and names a beneficiary for the account to pass on to.  There are special rules that apply to these accounts and they work a little differently than the IRA that is established by the original owner. The money in these accounts cannot be transferred to the beneficiaries’ own IRA, and the beneficiary cannot deposit her own funds into the account.  The tax code requires the beneficiary to make withdrawals, no matter how many years they may be from retirement. Also, the holder of the account may withdraw the entire balance at any time, without the penalty that applies for early withdrawal of regular IRA’s. Because of the unique characteristics of these inherited IRAs, some bankruptcy courts have considered them not to be exempt property.

This means that the full value of such an account would have to be surrendered to the trustee in a Chapter 7 bankruptcy. In a Chapter 13 bankruptcy, the value of the account would have to be re-paid to the unsecured creditors.  Not all courts have agreed however, and up until this year, there has been a split of opinions among bankruptcy courts in the United States.

The Supreme Court has now held that inherited IRAs are considered to be non-exempt property, and therefore, must be surrendered in a Chapter 7 bankruptcy.  [See 13-299_6k4c, 2014 WL 2608860 (U.S.).]  Specifically, the court held that money in an inherited IRA account is not “retirement funds,” as that term is used in section 522(b)(3)(C) of the United States Bankruptcy Code. That is the provision of the code that allows a debtor to chose exemptions for their bankruptcy.

How does this new Supreme Court ruling affect individuals and families filing bankruptcy in the state of Florida?  In my opinion, money in an inherited IRA account remains exempt for those who can claim Florida state law exemptions.  That is because the Florida legislature passed a law in 2011 that specifically permits the exemption of inherited IRAs from the claims of creditors.  This law was passed to overturn a  judicial decision that held that Florida’s exemption statute, section 221.21(a), Florida Statutes, does not include inherited IRAs.  The Supreme Court’s new ruling in Clark v. Rameker only addressed sub-section 522(b)(3)(C) of the bankruptcy code.  That section is separate and independent of section 522(b)(3)(A), which provides the general exemption under Florida law.

Nevertheless, no court has yet to address this question.   Inherited IRAs remain vulnerable to the claims of creditors.  Even if Florida bankruptcy courts agree with my position, the fact remains that this Florida exemption can only be claimed by persons who file in Florida and who can claim the Florida exemptions.  If a Florida resident died leaving her beneficiaries with an inherited IRA account, those beneficiaries may live in another state.  Their exemption rights would not be determined by Florida law. Unless these out-of-state beneficiaries live in states that have laws as protective as Florida, the funds in the inherited IRA could be sacrificed to creditors in a bankruptcy. This new decision makes it more likely that inherited IRAs will be surrendered in bankruptcy.

Consult with your financial planner to discuss which options might be best for protecting heirs whose finances could be shaky enough that they would be facing bankruptcy. If you are the recipient of an inherited IRA, you should also see advice about how to protect this asset, if you are in jeopardy from the claims of a creditor, or if you are contemplating seeking bankruptcy relief in the near future.

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