[Back to Index]     [Back to 2007 Texas Case Summaries]

In re Jarboe, 2007 WL 987314 (Bkrtcy. S.D. Tex. 2007).

Other Estate Planning Matters

Individual Retirement Accounts

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.

[Back to Index]     [Back to 2007 Texas Case Summaries]