In re Jarboe, 2007 WL 987314 (Bkrtcy. S.D. Tex. 2007).
Mother died leaving her IRA to Son. Several years later, Son filed
for bankruptcy claiming that the IRA was exempt under Texas Property
Code § 42.0021. The bankruptcy trustee, however, asserted that the
inherited IRA was not exempt because it “does not qualify under the
applicable provisions of the Internal Revenue Code” as required by §
42.0021.
The court agreed with the bankruptcy trustee that the IRA was not
exempt. The trustee conceded that if Mother were the bankrupt debtor, §
42.0021 would exempt the IRA. However, in this case, the debtor obtained
his interest upon his mother’s death which means Son’s interest is in an
“inherited” IRA. The court recognized that no case in the Fifth Circuit
had addressed the exempt status of an inherited IRA but was impressed
with the reasoning of bankruptcy cases from other circuits which deny
inherited IRAs exempt status. The basis of the distinction is that
inherited IRAs were not funded by the debtor and thus the policies
behind exempting these accounts do not apply. In addition, § 42.0021
requires that the account not just be called an IRA, but it must meet
the technical requirements of 26 U.S.C. § 408 to qualify. An inherited
IRA does not so qualify for a variety of reasons such as the beneficiary
being unable to roll over the IRA into another account or make further
contributions to the account and having the ability to make withdrawals
without penalty and being required to withdraw the entire amount within
five years.
Moral: A person who receives an IRA from a person other than his or her
spouse and who is concerned about its availability to creditors upon
bankruptcy may wish to reinvest the proceeds in exempt assets such the
homestead.