Inherited IRA Not Exempt in Bankruptcy Under Illinois Law

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By Diane Davis

Chapter 7 debtors can’t claim an exemption in an inherited individual retirement account (IRA) under Illinois law, the U.S. Bankruptcy Court for the Central District of Illinois held.

The debtors failed to identify any meaningful difference between the Illinois exemption statute on which they rely and the provisions of the Bankruptcy Code interpreted by the U.S. Supreme Court in Clark v. Rameker, Judge Mary P. Gorman wrote Jan. 19.

Clark held that funds in an inherited IRA weren’t entitled to the exemption under the Bankruptcy Code for “retirement funds,” the court said.

Inherited IRAs have “distinct legal characteristics that distinguish them from traditional IRAs” and result in them losing their status as “retirement funds,” the court said. "[F]unds in an inherited IRA may be used freely and aren’t objectively set aside for one’s retirement,” the court said, citing Clark.

Michael and Patricia Smith inherited ownership of an IRA valued at $44,361 from Patricia’s mother. They claimed the entire amount exempt under Illinois law.

Chapter 7 Trustee Mariann Pogge objected, arguing it didn’t qualify for the exemption based on Clark.

The court rejected the Smith’s attempt to distinguish Clark by saying it was based on Wisconsin law and couldn’t control under Illinois law.

“There is no meaningful difference between the Illinois exemption and the exemption construed in Clark,” the court said.

While the Illinois Supreme Court hasn’t yet ruled on the issue, the Illinois Appellate Court’s decision in In re Branit, indicates that if faced with the issue, that court would follow Clark, the court said.

The findings and holdings in Branit aren’t “dicta"—the part of a judicial opinion in which a judge merely editorializes and doesn’t directly address the specifics of the case—as the Smith’s argued, and can’t be ignored, the court said.

Gerald L. Timmerwilke, Quincy, Ill., represented the Smiths; Trustee Pogge, Springfield, Ill., represented herself; and U.S. Trustee Nancy J. Gargula, Peoria, Ill., represented herself. The case is In re Smith , 2018 BL 18617, Bankr. C.D. Ill., No. 17-71371 Chapter 7, 1/19/18 .

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

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

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