Sep 1, 2010 12:00 PM

Recent Developments in Bankruptcy Law

By Thomas C. Foster

Four recent court decisions shed some new light on certain situations clients may encounter in dealing with creditors' claims on individual retirement accounts and employer sponsored tax-qualified retirement benefits. Three of those were bankruptcy court decisions dealing with inherited IRAs (Nessa, Chilton and Tabor).¹ The courts in those cases reached differing conclusions concerning whether IRAs inherited by the original owners' daughters are entitled to the same exemption that would have pertained to IRAs of the living original owners. One case was from the Tax Court (Wadleigh).² That decision illustrates that an individual's retirement benefits may be, with the wrong fact situation, vulnerable post-bankruptcy for his pre-bankruptcy federal tax liens.³

The three bankruptcy court decisions deal with whether inherited IRAs are eligible for the Bankruptcy Code exemption for “[r]etirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457 or 501(a) of the Internal Revenue Code of 1986.”⁴ In each case, the debtor-daughter in the bankruptcy proceedings was the beneficiary of an IRA of her parent who had passed away. Following her parent's death, each debtor directly transferred the deceased parent's IRA to another IRA titled in substantially the IRS' recommended form, that is, “debtor's name, beneficiary of (parent's name), deceased IRA.” It appears that all three IRAs were under ordinary custodial arrangements allowing the debtors to withdraw all, or any portion, of her IRA at any time. Also, none of the cases alleged or hinted at any acts that would have disqualified any of the IRAs.⁵ Finally, in each case, the debtor claimed the exemption in her bankruptcy filing and the bankruptcy trustee objected.

Topics of Interest

Estate Tax	Donor Advised Funds
GSTs	Family Offices
Private Foundations	Life Insurance
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Topics of Interest

Estate Tax	Donor Advised Funds
GSTs	Family Offices
Private Foundations	Life Insurance
2010 Tax Act News	Industry Trends Surveys

E-Newsletter Signup

2011 Trust Glossary

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50 Years Ago This Month

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50 years ago, in May 1962, we featured articles such as: "Future of Canadian Trusteeship" by Arthur H. Mingay", "Training Trust Employees" by Ian M. Marr, "What is a Trust Officer?" by Eric J. Brown, and "Selling Services" by Donald I. Webb.

Conrad Teitell's Guide to Tax Benefits For Charitable Gifts

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