Debtor's IRA Is Exempt From Creditors Under Texas Law

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By Diane Davis

July 12 — A debtor's interest in the assets contained in her Individual Retirement Account (IRA) and her right to receive distributions from the IRA are “unconditionally exempt” from creditors under the Bankruptcy Code and Texas law, a bankruptcy court in Texas held July 6 ( In re Moore, 2016 BL 217092, Bankr. E.D. Tex., No. 15-42046 (Chapter 7), 7/6/16 ).

Judge Brenda T. Rhoades of the U.S. Bankruptcy Court for the Eastern District of Texas overruled Chapter 7 trustee Chrisotpher Moser's objection to debtor Elizabeth Bratton Moore's claimed exemption in her IRA.

Tex. Prop. Code § 42.0021(a) provides an unlimited exemption of the account holder's right to the assets held in the account, as well as the account holder's right to receive the payments from the account, the court said.

Differs From Homestead Exemption

The IRA exemption scheme is “fundamentally different than the homestead exemption scheme under Texas law, the court said. The Texas homestead exemption exempts the homestead itself, regardless of value, the court said. An IRA, the court said, is a “monetized asset” and is “nothing more than a savings account established to defer tax liability and to supplement the beneficiary's retirement income in the future.”

According to the court, an IRA is used to save for retirement, and the “Texas exemption scheme prevents creditors from depriving people of a source of income in their old age.”

The distribution of the exempt asset received by the debtor is exempt under the specific language of § 42.0021(a), the court said. This interpretation is consistent with the legislative intent and purpose of the IRA exemption statute, the court said. If the court adopted the trustee's argument, it would frustrate the purpose of the IRA exemption by preventing debtors from meeting their basic needs, the court said.

The debtor suffers from early-onset Alzheimer's disease and is unable to work. She filed for Chapter 7 bankruptcy in which a debtor's nonexempt assets are liquidated by a trustee and the proceeds are distributed to creditors.

On her bankruptcy schedules, she claimed her interest in her IRA with a balance of $125,854 exempt from creditors under Texas law. Subsequently, she withdrew $28,000 from her IRA. A portion was withheld to pay income taxes, and she received the balance to pay her living expenses for three months. At the time she filed for bankruptcy, she had less than $1,000 in her bank account.

Trustee's Objection

The trustee objected to the debtor's exemption in her IRA, arguing that funds invested in an IRA are only conditionally exempt. According to the trustee, all funds withdrawn from the IRA by the debtor, including the funds withheld for the payment of income taxes, lost their exempt character because of the debtor's failure to use the funds to make a rollover contribution into another exempt retirement account.

According to the trustee, the IRA exemption under Texas law makes the IRA exemption conditional, like the Texas homestead-sales proceeds exemption, and all funds distributed from an IRA retroactively lose their exempt character unless they are transferred into another retirement account within 60 days. The trustee contended that he is entitled to recover all funds the debtor received from her retirement account post-petition to pay her living expenses so that he can distribute the funds to her pre-petition creditors.

Frost Doesn't Control

The court rejected the trustee's arguments, concluding that the trustee failed to establish grounds for extending the holding of Viegelahn v. Frost (In re Frost), 744 F.3d 384 (5th Cir. 2014) (26 BBLR 390, 3/20/14), which dealt with the homestead exemption, to the IRA exemption. In Frost, because a debtor sold his homestead and did not reinvest the proceeds in another homestead within six months, under Texas law, the proceeds were no longer exempt from the estate.

Frost does not control the present case,” the court said.

The court also noted that the 60-day period in § 42.0021(c) echoes the Internal Revenue Code which allows 60 days for a distribution from an IRA to be transferred to another retirement account. An account holder who receives a distribution from an exempt IRA and doesn't transfer the distribution to another exempt account within 60 days may not exclude the distribution from her taxable income.

Nothing in § 42.0021(c) requires an account holder to safeguard distributed funds for 60 days or to transfer the funds into another retirement account, the court said. The purpose of the exemption is to render property “impregnable to the assaults of creditors,” the court said. The exemption doesn't disappear when the account holder receives a distribution, the court said. According to the court, the distribution the debtor received from her IRA didn't lose its exempt status “simply because she received it.”

Weldon Reed Allmand, Allmand Law Firm, PLLC, Hurst, Texas, represented debtor Elizabeth Bratton Moore, aka Elizabeth B Murphy, aka Beth Murphy, aka Elizabeth Bratton; Robert T. DeMarco, DeMarco-Mitchell, PLLC, Plano, Texas, represented Chapter 7 Trustee Christopher Moser.

To contact the reporter on this story: Diane Davis in Washington at ddavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

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