IRA funds are exempt from creditors in and out of bankruptcy pursuant to the exemption in Florida Statute 222.21(a)– except if your “IRA” is inherited, according to a recent decision by a Florida appellate court.
The case considered a judgment creditor’s claim against the debtor who had inherited IRA funds from his deceased parent. The parent started the IRA and contributed pre-tax money during his lifetime. The court recognized that the parent’s IRA was exempt from the parent’s own creditors during the parent’s lifetime. When the parent died, the debtor/son had the option under the tax law to withdraw all of his parent’s IRA money over a five-year period or retain the money in what the IRS rules call an “inherited IRA.” An inherited IRA is not subject to a five-year distribution rule, and it requires the debtor/son to take minimum distributions annually- the distributions could not be deferred.
The court found that the language of 222.21(a) does not apply to inherited IRAs because the statutory language refers to the “original fund or account” of the IRA. The court also noted that the tax consequences of inherited IRAs are significantly different because although there is no taxation until withdrawal the beneficiaries of inherited IRAs are required to take annual distributions. The court found that the public policy behind IRA exemption to allow debtors to preserve assets for their own retirement does not apply to the named beneficiaries after death. A surviving spouse’s rollover IRA is not affected by this court ruling and remains exempt under the Statute.
I assume the debtor’s counsel s for the benefit of debtors.. This court elected to strictly construe the statutory language to find that inherited IRAs are outside the intended statutory exemption. On the other hand, I recognize a strong policy argument supporting this court’s decision. The exemption laws protect debtors during their lifetimes and generally do not extend to their heirs. Inherited money or assets in most cases is not protected from the heirs’ creditors. For instance, when a parent dies leaving his exempt homestead to his children the property, or the sales proceeds, is not exempt from the children’s creditors unless the children occupy the house as their own homestead. I assume the court reasoned that the parent’s IRA funds should not be exempt from the beneficiary’s creditors just because the money is held in a fund called an “inherited IRA” which is different in character and purpose than the traditional, tax deferred IRA account described by the applicable statute.
No Florida bankruptcy court has dealt with the same issue.
I suspect most Florida residents assume that all IRAs- all funds that qualify as IRAs under IRS rules- are exempt. This is no longer the case. If you have an inherited IRA and are concerned about asset protection you should consider other asset protection tools to protect this money. Parents concerned about protecting their estate from their children’s creditors should get professional financial or legal advice to structure their IRAs so they will be protected after their deaths.
The case is 2D08-6428. Thanks to Jesse Toca for bringing this case to my attention.
posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida.
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