Debtor can claim state law exemption in inherited IRA.


Byline: Eric T. Berkman

A debtor could claim a state law exemption in an individual retirement annuity inherited from a non-spouse, the Rhode Island Supreme Court recently ruled in a certified question from the U.S. Bankruptcy Court.

Under G.L. 9-26-4(11), individual retirement annuities and individual retirement accounts (or IRAs) as defined in 408 and 408A of the Internal Revenue Code are exempt from attachment. While the U.S. Supreme Court ruled in its 2014 Clark v. Rameker decision that an inherited IRA is not a "retirement" account for purposes of bankruptcy protection under the federal exemption scheme, it has been unclear whether inherited IRAs are protected under Rhode Island state law by 9-26-4(11).

Here, the Chapter 7 trustee, in challenging debtor Lynette Kapsinow's claim of state law exemption, argued that the definition of an IRA under the relevant Internal Revenue Code provisions did not include inherited IRAs. The trustee also contended that a description of inherited IRAs within a subsection of 408 discussing the tax treatment of rollover IRAs did not constitute a definition.

But the Supreme Court disagreed.

"For the purposes of this case, it matters not that the term inherited IRA is defined in a statutory section devoted to the rollover treatment of IRAs for tax purposes," Justice William P. Robinson wrote for the court. "It is clear that the General Assembly included IRAs as defined in any and all parts of 408, not just 408(a) and/or (b). The General Assembly was certainly free to restrict exemptions to IRAs as defined in 408(a) and/or (b). However, in this case, it chose not to do so."

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CASE: In re: Kapsinow, Lynette, Lawyers Weekly No. 60-099-19 (17 pages)

COURT: Rhode Island Supreme Court

ISSUE: Could a Chapter 7 debtor claim a state law exemption in an individual retirement annuity inherited from a non-spouse?

DECISION: Yes[/box]

'All-out assault'

Debtor's counsel Christopher M. LeFebvre of Pawtucket hailed the ruling as important.

"Since [Clark] came down, there's been an all-out assault by trustees on the ability to claim the exemption even under state law," LeFebvre said. "Trustees have been trying to convince bankruptcy judges that the federal law is so clear that they should look very carefully at state laws allowing the exemption. And there have been many opinions where the bankruptcy courts when interpreting state law are swayed by the policy considerations of...

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