A federal court has determined that money in inherited individual retirement accounts is protected by federal exemption laws from collection by creditors.
Federal bankruptcy laws permit individuals to claim certain property as exempt from the reach of their creditors. Many types of retirement accounts and benefits are protected by these exemptions. Inherited IRAs hold funds from a person who established Individual Retirement Accounts for their own use and died before depleting the funds in those accounts. Federal District Judge Barbara Crabb recently reversed a decision by the Bankruptcy Court, and concluded that funds in an inherited individual retirement account are exempt and protected from claims of the heir’s creditors. In re Clark, Case No. 11-cv-482, U.S. District Court for the Western District of Wisconsin.
Judge Crabb considered only the exemption provided under federal bankruptcy law, 11 U.S.C. §522(b)(3)(C). She concluded that funds in an inherited IRA are retirement funds and that the account was exempt from tax after the funds transferred, thus meeting both requirements to be protected from creditors under the law.
The case is now on appeal to the Seventh Circuit. That Court’s decision will further develop the law in this area, and provide additional guidance to Wisconsin debtors and their creditors on what funds may be available to pay an individual’s debts.