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With the Texas case of In re Chilton reversed in U.S. District Court, which held that the debtor's inherited IRA was exempt from the claims of creditors, all bankruptcy courts that have ruled on the issue have determined that inherited IRAs are exempt in bankruptcy.  Citizens in Florida, Minnesota, California, Ohio, and Washington (and essentially any other state that relies on the federal, rather than state, exemptions) can rest assured that any inherited IRAs will be protected should they have to file for bankruptcy.*

However, bankruptcy trustees in the Chilton and In re Hamlin (Arizona) cases have appealed the decisions to the Fifth and Ninth Circuit Courts of Appeal, respectively.  (The links lead to Amicus briefs have been filed the the National Association of Consumer Bankruptcy Attorneys.)  The Tabor (Pennsylvania) case is on appeal to the Third Circuit.  I believe the lower court holdings will be upheld, but in the meantime, at least, there is no certain protection for Texas, Arizona and Pennsylvania residents.

In non-bankruptcy situations, and for residents of other states, such as North Carolina, the issue of protection of inherited IRAs remains unsettled.  Use of an IRA trust to protect the IRA you leave to your children or grandchildren can ensure protection and proper management.

*Selected citations: In re Nessa, 426 B.R. 312 (8th Cir. BAP 2010), In re Tabor, 433 B.R. 469 (Bankr. M.D. Pa. 2010), Bierbach v. Tabor, No. 10-cv-1580 (M.D. Pa. Dec. 2010) (unreported) (appeal  pending), No. 10-4660 (3rd Cir.), In re Weilhammer, 2010 WL 3431465 (Bankr. S.D. Cal. Aug. 30, 2010); In re Kuchta, 434, 463 B.R. 837 (Bankr. N.D. Ohio 2010); In re Thiem, 2011 WL 182884 (Bkrtcy. D. Ariz. 2010); and In re Johnson, 2011 WL 1674928 (Bkrtcy W.D. Wash. 2011)

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 I previously blogged about the ruling by the North Carolina Court of Appeals that in addition to IRA accounts being exempt from creditors, distributions from IRAs were also exempt.  On appeal, the North Carolina Supreme Court held that “there may be some circumstances under which withdrawn funds are no longer exempt from execution.” 

The Court stated that the trial court had acted within its broad equitable power when it approved a framework that the parties had established on their own to determine the exemption status of any IRA withdrawals. The Court then affirmed the Court of Appeals in its ruling that IRAs are exempt from the owner’s creditors, but it reversed the other part of the appellate court’s decision that had invalidated the escrow agreement. The Supreme Court then ordered the case remanded to the appellate court for additional proceedings.  Kinlaw v. Harris, No. 20A10, N.C. 11/5/10

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In a ruling entered on March 16, 2011, the U.S. District Court for the Eastern District of Texas, in Chilton v. Moser (2011, DC TX) 2011 WL 938310,  reversed the bankruptcy court and held that a debtor's inherited IRA met the requirements for a bankruptcy exemption under Bankruptcy Code §522(d)(12).

While this case is encouraging given other cases that have held that inherited IRAs were not protected, this holding applies only to bankruptcy cases, and is law only in the Fifth Circuit.  North Carolina is under the jurisdiction of the Fourth Circuit Court of Appeals.

See these earlier posts (1) (2) about the Chilton ruling in the bankruptcy court and other cases.

I continue to recommend IRA Trusts as the best way to protect IRA funds for beneficiaries.

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I previously blogged about inherited IRAs being subject to the claims of creditors, both in (In Re: Jarboe) and outside of (Robertson v. Deeb) bankruptcy, and one case (In Re: Nessa) where an inherited IRA was determined to be protected under federal law.

Here's a summary of the latest ruling, which contradicts the Nessa holding, courtesy of Robert Keebler, CPA:

In In Re: Chilton, the United States Bankruptcy Court for the Eastern District of Texas found that an inherited IRA is not equivalent to an IRA for purposes of determining whether the account contains “retirement funds” that may be exempted from the bankruptcy estate under U.S.C. § 522(d)(12).  The Court also found that an inherited IRA is not a traditional IRA exempt from taxation under IRC § 408(e)(1).   In Re: Chilton, 105 AFTR 2d 2010-XXX, 03/05/2010;

There is really no way to reconcile the holdings in Nessa and Chilton, but the Nessa decision is clearly the minority view.  If you want to protect your IRA from your heirs creditors, it is vitally important to utilize a standalone IRA trust .
 

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In a decision dated February 2, 2010, the North Carolina Court of Appeals upheld the Superior Court Judge's 2009 decision in Brown Brothers Harriman Trust v. Anne P. Benson, et al. Click here for my previous post about this case.

The Court of Appeals ruled that North Carolina's constitution does not require application of the common law rule against perpetuities' restriction of the remote vesting of future interests in property.  The court held that N.C.G.S. Section 41-23, which repealed the common law rule against perpetuities (in 2007), is a valid exercise of the General Assembly's authority.  Brown Brothers Harriman Trust Co., N.A., as Trustee of the Benson Trust v. Anne P. Benson, et al, No. COA09-474.

The effect of this ruling is that dynasty trusts are clearly a valid planning tool in North Carolina.  The only requirement is that the trustee be given the power to alienate (sell) the property in the trust.

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Here's a summary of Burton v. Williams, a recent North Carolina Court of Appeals case (adapted from today's NAELA eBulletin):

Plaintiff sued defendant as attorney-in-fact for decedent, alleging that an addendum and payment agreement release entered into between decedent and defendant regarding the sale of decedent’s property were void and unenforceable.  The grounds were that (1) At the time the documents were signed, decedent lacked the mental capacity to assent to the addendum and release; (2) the agreements were obtained through undue influence and duress; (3) they were procured through fraud; and (4) they were not supported by consideration.  After presenting his evidence, plaintiff moved for a directed verdict, and the court granted on grounds that the release was void and unenforceable for lack of consideration.  Defendant claimed this violated his right to trial by jury. However, because plaintiff established his claim through documentary evidence, which both parties stipulated was authentic and correct, the Court of Appeals ruled that the trial court properly directed the verdict in favor of plaintiff despite plaintiff having the burden of proof at trial. No consideration for the payment agreement was specified, and the document which was the basis of the agreement, as a matter of law, was not a valid contact. 

Burton v. Williams, 2010 N.C. App. LEXIS 93 (January 19, 2010)

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I recently received the following email, and then had a phone conversation with its author.  This is a legitimate documentary, with filming to take place in Montreal over the course of the year.  All expenses for the trip to Montreal will be paid.  Feel free to contact me or Ms. Ouimet directly.  Click "Continue Reading" for the "looking for" message referred to by Ms. Ouimet.

Dear Mr. Herman-Giddens,

I'm a researcher working on a documentary series about people's first-hand experiences with a family will. The project is being produced for a major US broadcaster.

I came across your blog and found your knowledge very inspiring. I was hoping you may have stories to share with me and perhaps help me get in touch with families having dealt with a difficult will story. We would also very much appreciate having you on board as our legal expert to help us make sense of all the legal complexities surrounding wills in your state.

Our series explores various, unexpected family issues surrounding wills. We would like to showcase the powerful, true-life stories of family wills, in an effort to create a deeper awareness of the difficult subjects of legal wrangling, conflict, grief and deep-seeded dynamics that can often arise when the will of a loved one is read. 

We believe it will help others reach closure on their feelings concerning a past will, and help them make sense of their own experience with a will.

Please feel free to share the "looking for" text pasted below with your clients or on your blog if you wish and/or deem it acceptable.

Thank you, I look forward to hearing from you soon.

Katherine

--

Katherine OUIMET

___________________________________

CMJ Productions -

http://www.cmjprod.ca

The Will (working title) / a ten-part hour-long documentary series

koandco@gmail.com

514-277-5504

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