Q&A with Jim Prince
Retirement funds may be exempt
in case of holder’s bankruptcy
Q: The U.S. Supreme Court recently weighed in on whether certain assets are exempt from bankruptcy. How are assets — specifically retirement funds — typically treated in bankruptcy?
A: When an individual files for protection under the federal Bankruptcy Code, the individual’s assets are generally available to be used to pay creditors. However, the Bankruptcy Code exempts certain categories of assets, thereby making them available to the debtor. The code provides two basic categories of exempt assets: federal statutory exemptions and exemptions provided for under the law of the state where the bankruptcy proceeding is filed. A bankrupt person is permitted to choose the category of assets that will be applied in his/her bankruptcy unless applicable state law indicates that the state law exemptions must apply. In addition to these categories, the Bankruptcy Code provides an exemption for retirement funds that are in an account or a fund that is exempt from taxation. IRAs are exempt from taxation under Section 408 or 408A of the Internal Revenue Code. So, in Oklahoma, IRAs may be exempt under either state law or under the federal protection provided for retirement funds under the Bankruptcy Code.
Q: What did the U.S. Supreme Court specifically say about inherited IRAs?
A: Earlier this summer, the U.S. Supreme Court ruled that an IRA that’s inherited from a person other than a spouse is not a retirement fund within the meaning of the federal bankruptcy exemptions. The high court specifically found that an inherited IRA wasn’t an exempt asset because it wasn’t set aside for the purpose of retirement by the person who inherited it.
Q: How does the Supreme Court’s ruling affect IRAs in Oklahoma?
A: Oklahoma elected to preclude the use of the federal exemption list and opted to have its own list of exemptions apply. The assets that are exempt under Oklahoma law include “any interest in a retirement plan or arrangement qualified for tax exemption or deferment purposes under present or future acts of Congress.” A “retirement plan or arrangement qualified for tax exemption purposes” includes IRAs and individual retirement annuities. Therefore, despite the U.S. Supreme Court’s ruling concerning the federal exemption for “retirement funds,” a court in Oklahoma could still could hold that an inherited IRA is exempt under Oklahoma’s statute. However, to do so, the Oklahoma court would have to reject the reasoning of the U.S. Supreme Court. It remains to be seen whether an Oklahoma or a federal bankruptcy court construing Oklahoma law will follow the lead of the Supreme Court with respect to inherited IRAs.
PAULA BURKES, BUSINESS WRITER