Your father’s last will and testament gives you his IRA of $180,000. He died yesterday. Next week you file for Chapter 7 bankruptcy relief because your credit card debt of $40,000 is too much for you to handle. You inform your lawyer of your inherited IRA. Your lawyer tells you, not to worry, because IRA’s are exempt pursuant to Section 522(b)(3)(C) and (d)(12) which states that “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under sections 401, 403,408,408A,414,457, or 501(a) of the Internal Revenue Code of 1986.” He tells you that IRA’s meet this requirement. Therefore, your father’s IRA which you inherited is exempt in bankruptcy. The logic seems correct. However, bankruptcy courts are split among the circuits regarding a debtor’s ability to exempt inherited IRA’s.

When a married holder of an IRA dies, his or her spouse inherits the IRA, and can keep it separate or roll it over into his or her own IRA. None of the conditions or attributes of the IRA change as a result of the passing of the IRA from a deceased spouse to the surviving spouse.

It’s a different story when the IRA passes to someone other than a surviving spouse, like from father to son.

In RE CLARK, the debtor inherited her mother’s IRA, which was worth about $300,000. She could not add to it or roll it over into her own IRA. Instead of holding the money for her retirement, the IRS required the debtor to begin taking distributions from the IRA within one year of her mother’s death, and exhaust the account within as little as five years. This is one of the reasons why everyone hates the IRS. Instead of allowing you to keep your parent’s IRA as such, it requires you to use the entire account in 5 years starting year one. They are nasty.