Fifth Circuit, apparently the first Circuit Court to address this, ruled this week than an inherited IRA is an exempt asset:
UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT
2012 U.S. App. LEXIS 5140
March 12, 2012, Filed
Appeal from the United States United States District Court for the Eastern District of Texas.
Chilton v. Moser, 444 B.R. 548, 2011 U.S. Dist. Lexis 27002 (E.D. Tex. 2011).
PROCEDURAL POSTURE: Appellant Chapter 7 trustee sought judicial review of a decision by the United States United States District Court for the Eastern District of Texas to reverse a bankruptcy court's ruling that an inherited Individual Retirement Account (IRA) did not qualify for exemption under 11 U.S.C. Section 522(d)(12).
OVERVIEW: The question of whether an inherited IRA satisfied the two requirements of Section 522(d)(12) was a question of first impression for the United States Court of Appeals for the Fifth Circuit and its sister circuits. The $170,000 contained in the inherited IRA constituted retirement funds as that phrase was used in Section 522(d)(12). While the parties agreed that the debtors' inherited IRA was tax exempt, they disagreed over which section of the Internal Revenue Code rendered it exempt. The trustee contended that inherited IRAs were tax exempt pursuant to 26 U.S.C. Section 402(c)(11)(A). The debtors responded by arguing that the inherited IRA was tax exempt pursuant to 26 U.S.C. Section 408(e). Since the transfer of the IRA took place before the debtors filed for bankruptcy, the issue was which provision rendered the inherited IRA exempt from taxation subsequent to the transfer. Section 408 rendered the inherited IRA exempt from taxation following its transfer from the deceased to the debtors. Because Section 408 was one of the sections named in Section 522(d)(12), inherited IRAs are contained in an account that is exempt from taxation as that phrase is used in Section 522(d)(12).
OUTCOME: The judgment of the district court was affirmed.