On March 12, 2012, in a case of first impression, the Fifth Circuit held that inherited IRAs are exempt pursuant to 11 U.S.C. section 522(d)(12). Chilton v. Moser (In re Chilton), Case No. 11-40377 (5th Cir. Mar. 12, 2012).
In Chilton, the Debtors Robert and Janice Chilton inherited an IRA worth $170,000 from Janice's mother, Shirley Heil. When Heil died on Nov. 28, 2007, Heil's account at RBC Dain Rauscher passed to Janice, without passing through probate. Janice established an IRA with RBC Dain Rauscher to receive distributions from Heil's IRA.
When the Chiltons filed for bankruptcy on Dec. 18, 2008, the Chilton sought to exempt the inherited IRA from the bankruptcy estate under section 522(d)(12).
The Fifth Circuit held that the defining characteristic of "retirement funds" is the purpose they are "set apart" for, now what happens after they are "set apart," and "retirement funds" can include the funds that others originally set aside. The IRA Janice set up was tax exempt under 26 USC 408(e) based on the statute's expansive language and definitions, and because section 408 is one of the sections named in 11 USC section 522(d)(12), inherited IRAs are exempt under 522(d)(12).