A weekly news service that publishes case summaries of the most recent important bankruptcy-law decisions, tracks major commercial bankruptcies, and reports on developments in bankruptcy reform in...
Nov. 3 — Kansas debtors can't count on a state statute exempting “retirement plans” from collection to protect inherited individual retirement accounts in bankruptcy.
In an Oct. 30 decision, Judge John W. Lungstrum of the U.S. District Court for the District of Kansas relied on a recent Supreme Court decision that held that inherited IRAs aren't exempt in bankruptcy under the Bankruptcy Code.
After Rebecca Mosby filed for Chapter 7 bankruptcy, she tried to claim an exemption for a $15,000 IRA she had inherited from her mother. The trustee in her case objected to the exemption.
The bankruptcy court sided with the trustee and found that the inherited IRA wasn't exempt under a Kansas statute that exempts “retirement plans” from collection. The bankruptcy court relied on Clark v. Rameker, 2014 BL 162671, 134 S. Ct. 2242 (2014), in which the Supreme Court held that inherited IRAs aren't “retirement funds” within the meaning of Section 522(b)(3)(C) of the Bankruptcy Code.
The district court sided with the trustee and bankruptcy court, finding that an inherited IRA isn't a “retirement plan” within the meaning of the Kansas statute. The district court also relied on the reasoning from Clark.
“In applying the ordinary meaning of the term, the [Supreme Court in Clark] held that ‘retirement funds' means, under an objective standard (not case-by-case), ‘sums of money set aside for the day an individual stops working,'” the district court said.
The court said that the Supreme Court and the Kansas Supreme Court would likely similarly construe the Kansas statute regarding “retirement plans.” Therefore, the court held that “because an inherited IRA differs from other IRAs with respect to the holder’s ability and incentive to save for retirement[,] an inherited IRA does not constitute a ‘retirement plan.'”
The court rejected Mosby's argument that the inherited IRA was originally a qualifying “retirement plan,” finding that “such a backward-looking interpretation would render meaningless the requirement that the funds presently be in a ‘retirement plan' (and not merely that they be in an account qualified under the particular sections of the tax code).”
Mosby also tried to argue that the statute was intended to protect her because it protects retirement plans that are payable to “a participant or beneficiary.” Mosby argued that the use of the term “beneficiary” was intended to refer to the recipients of inherited IRAs, but the court disagreed and found that “the use of ‘beneficiary' in the statute does not suggest that the exemption must cover all situations involving beneficiaries whether or not the requirement of a ‘retirement plan' has been met.”
Other courts have made similar rulings in the wake of Clark. For example, a Louisiana district court relied on Clark in holding that an inherited IRA is not an exempt “tax-deferred arrangement” under Louisiana law. An Illinois state court also held that an inherited IRA wasn't exempt from collection efforts under an Illinois statute that exempts “retirement plans,” again citing Clark.
But a Minnesota bankruptcy court refused to extend the reasoning in Clark to an inherited tax code Section 529 plan, which is a tax-advantaged savings plan used for future college costs.
The debtor was represented by Ryan Lee White of Evans & Mullinix PA, Shawnee, Kan. The trustee was represented by Shane J. McCall of Lentz Clark Deines PA, Overland Park, Kan.
To contact the reporter on this story: Stephanie Cumings in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Jay Horowitz at mailto:%email@example.com
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)