In Re Thiem
MEMORANDUM DECISION
I. INTRODUCTION
In this matter of first impression, the chapter 7 trustee objects to the debtors’ claimed exemption for an individual retirement account (“IRA”) that Mrs. Thiem inherited as the beneficiary of her mother’s IRA prior to bankruptcy.
1
Having
II. JURISDICTION
The allowance of an exemption from property of the estate is a core proceeding. The court has jurisdiction over this matter pursuant to
III. FACTS AND PROCEDURE
Richard and Kay Thiem (the “debtors”) filed a voluntary chapter 7 petition on June 19, 2010. Mr. Thiem receives social security disability income while Mrs. Thiem is employed by the Tucson Medical Center.
In 2005, Mrs. Thiem’s mother died, leaving her traditional IRA 2 to the debtor and the debtor’s sister, who were the beneficiaries. Within 60 days of her mother’s death, $10,723.24 from the mother’s IRA, representing both sisters’ interests, was transferred into an “inherited” IRA entitled “Kay A. Thiem Wells Fargo # xxx6594, Marjorie Ann Dymock DECD.” Mrs. Thiem paid to her sister the sister’s share of the money using the debtor’s personal funds, while maintaining the original balance of funds in the IRA.
Between 2005 and the petition date, Mrs. Thiem took out only the required distributions from the inherited IRA, leaving a balance of $10,032.57 as of the petition date. Upon filing bankruptcy, the debtors claimed an exemption in the inherited IRA in the amount of $10,032.57 pursuant to Bankruptcy Code § 522(b)(3) 3 and the Arizona exemption for a retirement plan, Ariz.Rev.Stat. (“ARS”) § 33-1126(B).
The chapter 7 trustee timely objected to the claimed exemption, citing case law which construed federal exemption statutes. The debtors responded, also citing case law which interpreted federal law. Following a hearing, and while the matter was under submission, the debtors filed an amended exemption claim under § 522(b)(3), pursuant to ARS §§ 33-1126(B) and 33-1126(A)(l). The trustee then filed an amended objection, to which the debtors responded.
There is no dispute that the mother’s IRA qualified as an exempt IRA. The trustee objects, however, to the debtors’ assertion that the funds in the inherited IRA retained their exempt status, or are exempt under either state or federal law. The trustee also asserts that the debtors are only entitled to a $5,361.62 exemption, if any, reflecting the original amount of Mrs. Thiem’s half of the inherited funds.
TV. ISSUES
1. Whether the debtors can claim an exemption in the inherited IRA under either ARS § 33-1126(B) or § 522(b)(3)(C), or both.
2. Alternatively, whether the IRA is exempt under ARS § 33-1126(A)(l) as money received by a child “upon the life” of a deceased parent.
V. DISCUSSION
Upon the filing of a bankruptcy petition, an estate is created consisting of all of the legal or equitable interests of the debtor in property as of the commencement of the
A claimed exemption is presumptively valid, unless a party in interest objects and that objector satisfies its burden that the exemption is improperly claimed.
See In re Nicholson,
Arizona has opted out of the federal exemption scheme provided in
A. The available exemption statutes for an IRA
There is one relevant exception to the opt-out rule. In enacting BAPCPA,
5
Congress created a new class of exemptions for certain retirement funds regardless of whether the state of domicile has opted out of the federal scheme for other property.
6
retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.
“Now, even if some states may not allow retirement plans to be exempted from the reach of creditors, Congress has made this exemption available to all debtors by placing the language in
Congress’ intent was “to expand the protection for tax-favored retirement plans or arrangements that may not be already protected under [§ ] 541(c)(2) pursuant to
Patterson v. Shumate
... or other state or Federal Law.” HR Rep. No. 31, 109th Cong., 1st Sess. 224 (2005). In addition, such retirement fund may be claimed exempt even if it is only in “substantial compliance with” applicable requirements of the IRC, or if not, if the debtor can claim that he or she is not materially responsible for such failure of compliance.
Id.;
The debtor’s exemption rights under
In this case, both parties have also supported their arguments for and against exemption with the new federal exemption law. Therefore, the court deems the exemptions as also claimed under
Under either federal or state law, exemptions are to be liberally construed in favor of the debtor who claims the exemption.
In re Arrol,
In interpreting a statute, the plain language of a statute is determinative under federal law.
Patterson v. Shumate,
When interpreting a statute, we must first look to its language, the “best and most reliable index” of its meaning. Unless the legislature clearly expresses an intent to give a term a special meaning, we give the words used in statutes their plain and ordinary meaning. In determining the ordinary meaning of a word, we may refer to an established and widely used dictionary.
State v. Mahaney,
The debtors claimed an exemption under ARS § 33-1126(B), which provides, in pertinent part:
B. Any money or other assets payable to a participant in or beneficiary of, or any interest of any participant or beneficiary in, a retirement plan under § 401(a), 403(a), 403(b), 408, 408A or 409 or a deferred compensation plan under § 457 of the United States internal revenue code [sic] of 1986, as amended ... shall be exempt from any and all claims of creditors of the beneficiary or participant.
ARS § 33-1126(B) (2010 Thomas Reuters) (footnote omitted).
This statute is similar to
B. Section 408 of the Internal Revenue Code
The federal and state statutes recognize an exemption for an IRA that is provided for under the Internal Revenue Code,
There is no dispute that the mother’s IRA qualified as an exempt IRA under
Upon the death of an IRA owner, IRC § 408 provides for an “inherited” IRA:
(ii) Inherited individual retirement account or annuity. — An individual retirement account or individual retirement annuity shall be treated as inherited if—
(I) the individual for whose benefit the account or annuity is maintained acquired such account by reason of a death of another individual, and
(II) such individual was not the surviving spouse of such other individual.
In order to maintain tax-exempt status, an inherited IRA must meet the following criteria:
Inherited from someone other than spouse. If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. This means that you cannot make any contributions to the IRA. It also means you cannot roll over any amounts into or out of the inherited IRA. However, you can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary.
IRS Pub. 590, p. 20 (2010).
The beneficiary is required to begin taking withdrawals — either annual distributions based on life expectancy within one year or the entire amount within five years — regardless of the beneficiary’s age.
See id.
at 35; IRC § 408(a)(6); § 401(a); Treas. Reg.,
An inherited IRA may be transferred tax free in a direct trustee-to-trustee transfer. IRS Pub. 590, p. 20. “A taxpayer is not treated as having received a taxable distribution from an IRA if funds in the IRA are transferred from one account trustee directly to another account trustee without the IRA owner or beneficiary ever gaining control or use of the funds.”
Jankelovits v. C.I.R.,
Here, the debtors’ counsel, at the November 4th hearing, maintained that there was a “trustee-to-trustee” transfer to the
The trustee has not submitted any evidence to raise an issue concerning the aforementioned facts. For example, the trustee does not dispute that a direct transfer from the mother’s IRA to the inherited IRA occurred, even while the trustee analogizes that the funds in the inherited IRA are equivalent to a “cash inheritance.” See Trustee’s Reply 2, ECF No. 39. The gravamen of the trustee’s argument is that an inherited IRA is neither an exempt “retirement plan” under the Arizona statute nor exempt “retirement funds” under the federal statutes.
C. Case law — Two Camps
In the absence of any Arizona law on point, the trustee cites a series of cases from other jurisdictions which held that inherited IRAs are not exempt, while the debtors find support in contrary opinions. None of the statutes at issue in these cases specifically addressed inherited IRAs. Nor were the state statutes, if any, that were construed in these cases identical to ARS § 33 — 1126(B). None expressly provided an exemption for a plan “beneficiary,” as does the Arizona law, although most provided an exemption for a person’s “interest in” or “rights to” such a plan/fund, or words to that effect. All of the state statutes at issue provided an exemption for an IRA that qualified for tax exemption under IRC
In
McClelland,
the Idaho statute provided an exemption for “[t]he right of a per
Similarly, the Arizona statute does not limit the exemption to the person who contributed the funds, i.e., the owner or plan participant, but also entitles the beneficiary to receive the protection. In McClelland, the court had to interpret the broad language of the Idaho statute to extend to a beneficiary, whereas the Arizona statute expressly includes the beneficiary.
The trustee attempts to distinguish “retirement plan,” as provided in the Arizona statute, from “retirement funds,” as provided in § 522(b)(3)(C), therefore implying a required retirement purpose in ARS § 33-1126(B). The debtors, on the other hand, contend that the plain language of § 33-1126(B) does not require the beneficiary to use the plan funds for his or her own retirement purposes. 10
The trustee raises valid policy concerns concerning inherited IRAs that, simply, could be cashed out. Nonetheless, the plain language of ARS § 33-1126(B) protects “any money or other assets payable to a participant in or beneficiary of, or any interest of any participant or beneficiary in, a retirement plan under § ... 408 ... from any and all claims of creditors of the beneficiary or participant.” Id. (emphasis added). Therefore, under Arizona law, an inherited IRA is precisely the money payable to, or a beneficiary’s interest in, a retirement plan that is exempt from process. Any distinction is lost.
The trustee urges the court to adopt the reasoning of In re Lacefield, case no. 2:03-bk-22470-CGC, an unpublished decision entered on July 20, 2004. In that case, the debtor inherited, upon her mother’s death, the $483.62 a month her mother was receiving in retirement funds from the Indiana State Teacher’s Retirement Fund. When the debtor filed for bankruptcy, she claimed an exemption for the payments under ARS § 33-1126(B) [formerly designated as subsection (C) ], which provided an exemption for “[a]ny money or other assets payable to a participant in or beneficiary of, or any interest of any participant or beneficiary in, a [qualified] retirement plan.” The court rejected the claim, stating, without further analysis:
The key distinction here is that it was Debtor’s mother’s retirement fund and not Debtor’s retirement fund. Debtor was not a participant in or a beneficiaryof the retirement plan. Her mother was. Debtor receives these funds only as a result of her mother’s death and solely as an inheritance.
Id. at 3.
The facts in
Lacefield
are distinguishable from the instant case. Mrs. Thiem is clearly a named beneficiary of her mother’s IRA. IRS Pub. 590 states: “[i]f you inherit a traditional IRA, you are called a beneficiary. A beneficiary can be any person or entity the owner chooses to receive the benefits of the IRA after he or she dies.”
Id.
at 18.
See also
IRC § 401(a)(9)(E) (defining “designated beneficiary” as “any individual designated as a beneficiary by the employee”); Treas. Reg.,
The Lacefield decision was rendered pri- or to BAPCPA’s amendments, which were enacted to ensure that debtors may exempt, under either federal or state exemptions, retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under the enumerated sections of the IRC. Tax exemption extends to funds that are in an inherited IRA, as discussed above. Therefore, the holding of Lacefield is not helpful on this issue.
This court also agrees with the
Tabor
opinion. There, the debtor claimed an exemption for an inherited IRA account under Pennsylvania law and
[a]ny retirement or annuity fund provided for under section.... 408, ... of the Internal Revenue Code of 1986 ..., the appreciation thereon, the income therefrom, the benefits or annuity payable thereunder and transfers and rollovers between such funds.
Id. at 472.
Unable to locate any state court decision on the issue of whether inherited IRAs are exempt from process under the Pennsylvania law, the court held that it need not make a determination under state law and, instead, determined that the inherited IRA was exempt under
There are only two requirements for an IRA to be exempt under
This court also looks to
In re Kuchta,
The bankruptcy court found that the inherited IRA could not be exempt under state law because the statute expressly
The line of cases that deny exemptions in inherited IRAs commonly conclude that inherited IRAs are (1) fundamentally different from a traditional IRA under the IRC and (2) lack a retirement purpose. These courts determined that an inherited IRA is (1) subject to an entirely different set of rules upon the use, distribution and taxation of the funds, and (2) no longer for used for retirement purposes but is “a liquid asset which may be accessed by [the debtor] at his discretion without penalty, and which he
must
take as income within a relatively short period of time without regard for his retirement needs.”
In re Sims,
This court respectfully disagrees with these courts. Even though inherited IRAs are treated differently under the IRC, they are still protected from taxation for a time period that is provided under the IRC. In fact, the Internal Revenue Code and Regulations ensure that the original retirement funds will be protected and remain unchanged in character, e.g., by prohibiting contributions and rollovers to the new account. Therefore, it is not accurate to state that inherited IRAs do not meet the requirements for an IRA under
Nor did any of the above cases analyze
Secondly, another argument commonly made by these courts against allowing an exemption for an inherited IRA is a determination that the retirement funds must be the
debtor’s
own retirement funds.
See, e.g., Chilton,
The debtors cite to
Nessa.
There, the Eighth Circuit Bankruptcy Appellate Panel concluded that such a requirement would “impermissibly limit the statute beyond its plain language.”
Nessa,
Courts that have followed the reasoning of
Nessa
include
Tabor, Kuchta
and
In re Weilhammer,
The trustee has raised several additional objections to the exemption, which will be dealt with as follows, in no particular order.
Objection 1: Only monies that are “payable” are exempt under ARS § 33-1126(B)
Section 33-1126(B) protects money that is “payable” to the beneficiary. The trustee contends that the debtor was already paid the monies out of her mother’s IRA in 2005, and then merely “placed” the money into another IRA. Trustee’s Reply 2, ECF No. 39. Therefore, the trustee contends that the facts do not fall within the exemption.
As stated above, the undisputed facts and law are consistent with an inherited IRA under the Internal Revenue Code. The new IRA retains the mother’s name and is not designated solely as Mrs. Thiem’s account. Moreover, the funds in an inherited IRA may not be rolled over. IRC
There is a presumption that Mrs. Thiem’s IRA complies with the requirements of the IRC for a direct transfer of the inherited IRA, and the trustee has not rebutted that presumption with any evidence that it is not in compliance.
See
As such, the trustee’s objection is not persuasive in light of the specific means provided by the IRC to protect the tax-exempt nature of the funds in an inherited IRA. Therefore, the court finds that the retirement funds in the inherited IRA are still “payable” to Mrs. Thiem.
Objection 2: An inherited IRA receives its exempt status from IRC § 402(c) (11)
The trustee contends that the inherited IRA’s exemption is created under IRC § 402(c)(ll). Since that section is not listed in ARS § 33-1126(B) (designating §§ 401(a), 403(a), 403(b), 408, 408A or 409), the trustee asserts that an inherited IRA is not exempt.
Section 402 governs the “[t]axibility of beneficiary of employees’ trust.” An employees’ trust is described in IRC § 401(a).
See
IRC § 402(a). Section 402(c)(ll) allows the beneficiary of an employee trust to move the inherited funds into an IRA account for his or her benefit via a trustee-to-trustee transfer without paying taxes on the distribution, by treating the transfer as
This type of analysis was also made by the Texas bankruptcy court in
Chilton,
Such an analysis is not in accord with the legislative history of this section, which, ironically, was described in depth in the prior Texas case of
Jarboe.
There, the court discussed the amendment adding subsection (c)(ll) to
Whereas previously only the transfer of a decedent’s IRA could create an inherited IRA, now a trustee-to-trustee transfer of several types of retirement plans (i.e., not just IRAs but also employer-sponsored plans such as 403(a) plans, 403(b) plans, and 457(b) plans) may create inherited IRAs.
[T]he PPA does nothing to change the tax treatment of inherited IRAs; rather it only levels the playing field for more kinds of non-spouse beneficiaries, eliminating the somewhat harsh tax treatment of non-spouse beneficiaries of employer-sponsored retirement plans. (Prior to the passage of the PPA, non-spouse beneficiaries of employer-sponsored retirement plans typically had to take distribution either in a lump sum or within five years....)
Jarboe,
Legal authors have commented that
Chilton
engaged “in a very complex statutory analysis ... [something for which bankruptcy court judges are ill-equipped for statutes other than the Bankruptcy Code.”
See
A.J. Golden,
supra, Retirement Benefits and Creditor’s Rights,
SS007 ALI-ABA at 305. The authors then state: “In fact
In addition, IRC
Objection 3: The debtor’s payment to her sister was a prohibited “contribution”
The trustee contends that the tax exempt qualification of the inherited IRA was destroyed, either as to the entire fund or to half of it, when the debtor paid her sister her portion of the funds using the debtor’s personal funds. In essence, the trustee maintains, that transaction was a prohibited “contribution” to the IRA which destroyed the nature of the inherited IRA.
Alternatively, the trustee contends that the exemption should be limited to Mrs. Thiem’s half of the inheritance in the amount of $5,361.62.
An inherited IRA may not be treated as one’s own. “This means that you cannot make any contributions to the IRA. It also means you cannot roll over any amounts
The ordinary meaning of “contribution” is the act of contributing something, such as a payment, or “to give a part to a common fund.” Merriam-Webster’s Collegiate DiCtionary 272 (11th ed. 2004).
This court does not agree that Mrs. Thiem’s payment to her sister was essentially a “contribution” of her personal funds to the IRA. The same funds, which were the mother’s retirement funds, remained in the inherited IRA at all times. The arrangement between the two sisters was a distinct and separate transaction between two beneficiaries which did not affect the total amount or nature of the inherited IRA.
There are certain acts by a beneficiary, who is a fiduciary, that will cause a loss of the tax exemption, such as self-dealing, sale or lending of the money.
See
IRC
Therefore, the court holds that neither a contribution nor a prohibited transaction occurred to destroy the character of the IRA. The inherited IRA in its entirety is intact.
In summary, based on the foregoing analysis, the trustee has not rebutted the presumption that the assets in the inherited IRA are exempt under § 33-1126(B) and
D. The Alternate Claim under ARS § 33-1126(A)(l)
The debtors amended their Schedule C to claim an exemption in the inherited IRA pursuant to ARS § 33-1126(A)(l), which provides, in pertinent part:
A. The following property of a debtor shall be exempt from execution, attachment or sale on any process issued from any court:
1. All money received by or payable to a surviving spouse or child upon the life of a deceased spouse, parent or legal guardian, not exceeding twenty thousand dollars.
The trustee maintained that this statute’s reference to “money ... payable ... upon the life” only refers to life insurance, which is defined, elsewhere in the statutes as “insurance on human lives ...” ARS § 20-254, and generally described as “insurance on the life of’ someone. See ARS §§ 20-1257(A), 20-1603(3), 20-1131(A).
The court will overrule this objection on the following grounds. The legislative history reveals no useful information pertaining to the interpretation of the phrase at issue or the purpose behind the exemption. The legislature, however, knew how to write or amend subsection (A)(1) to limit it to the proceeds of life insurance policies if it had wanted to. In fact, subsection (A)(6) provides a certain exemption for “[t]he cash surrender value of life insurance policies ...” Section (A)(1), however, is not limited to “life insurance policies.”
When this statute was revised, in 1983, an article appeared in the Arizona Bar Journal (now Arizona Attorney), which presented two views of the new exemption law. Interestingly, in View 1, Professor Dale Beck Furnish wrote:
Other changes included increasing from $10,000 to $20,000 the exemption for money received by [sic] survivingspouse or child “upon the life” of a deceased spouse, parent or legal guardian, referring to life insurance and liability claims.
D.B. Furnish, “Arizona’s New Exemption Statute,” 19 Ariz. B.J. No. 3, p. 32, 42 (1983) (emphasis added). However, in View 2, Mr. Thomas Salerno, Esq. wrote that the same exemption statute
has been modified to allow a claimant to except funds up to $20,000 received due to the death of a deceased spouse, parent, or “legal guardian.”
Id. at 48 (emphasis added).
An Arizona bankruptcy court has also interpreted the statute broadly. In Lace-field, an unpublished decision previously cited by the trustee because the bankruptcy court, there, had disallowed the debtor’s exemption claim in an inherited pension under ARS § 33-1126(B), the court alternatively allowed the exemption under ARS § 33 — 1126(A)(1). The court found that the debtor was a “death beneficiary” as to those funds. In re Lacefield, case no. 2:03-bk-22470-CGC, at 4 (July, 20, 2004).
Mrs. Thiem received the funds in the inherited IRA due to the death of her mother. Therefore, this court "will also interpret ARS § 33-1126(A)(l) liberally as exempting Mrs. Thiem’s inherited IRA, as an alternative basis for the exemption.
VI. CONCLUSION
Mrs. Thiem’s inherited IRA, in the total amount of $10,032.57, is exempt under the Arizona exemption statute, ARS § 33-1126(B), which extends protection to monies payable to a beneficiary of a retirement plan which meets the requirements of the IRC. In addition, the retirement funds are exempt, for a debtor in an opt-out state, under
Alternatively, the inherited IRA are exempt funds received by a death beneficiary pursuant to ARS § 33-1126(A)(l).
Notes
. Although the Trustee objected to four exempted accounts, only the inherited account is still in controversy and Trustee has withdrawn her objections to the other three.
. A "traditional” IRA is any IRA that is not a Roth IRA or a Simple IRA. See IRS Publication 590 ("IRS Pub.”), p. 7.1.
. This statute is Title 11 of the United States Code. On Schedule C, the debtors must either check box
.There may be an unresolved issue regarding the burden of proof in exemptions claimed under state law, which was not briefed by the parties. In
Raleigh v. Ill. Dep't of Revenue,
The issue comes to light when comparing Judge Klein’s concurrence in
In re Davis,
Here, neither party has addressed the burden of proof under these Arizona statutes, nor could the court find any definitive case law. For purposes of this decision, and in the absence of clarification from the appellate courts, this court will presume that the Supreme Court in
Raleigh
did not affect the ultimate burden of proof allocation upon the trustee under
. BAPCPA stands for the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Public Law 109-8, 119 Stat. 23. The amendments apply to cases filed on or after October 17, 2005. BAPCPA §1501.
. Congress thus exercised its power to preempt state-court exemptions.
See
4 Collier on Bankruptcy ¶ 522.10[9] (the debtor's right to exempt retirement funds under
. The court sees no reason to require the debtors to formally amend Schedule C to recite
. These requirements are such things as the amount of allowable annual contribution, prohibition on commingling or investment in life insurance contracts, that the trustee be a bank, etc.
See
IRC
. Prior to explaining that a trustee-to-trustee transfer had actually taken place, the debtors had alleged that the funds were "rolled” into the new account within 60 days of the mother’s death. See Debtors' Mem. in Opp. 2, ECF No. 28. An inherited IRA cannot be rolled over or allowed to receive a rollover contribution. IRS Pub. 590, p. 24. Assuming,
ar-guendo,
that a cash distribution was "rolled” over, IRC
. In any event, the debtors maintain that Mrs. Thiem is using the money for retirement purposes because she takes only the required distributions and is reinvesting the distributions into another retirement vehicle. With regard to the debtors’ assertion that the IRA is being used for Mrs. Thiem’s retirement purposes, there is little to no evidence of this before the court. Therefore, the court will not address that part of the argument, nor does it need to in order to resolve this matter.