A 3/2 decision by the Rhode Island Supreme Court shows that an inherited individual retirement account, or IRA, can be exempt in bankruptcy under state law even though it would not be exempt under federal exemptions.
In Clark v. Rameker, 134 S. Ct. 2242 (2014), the Supreme Court ruled unanimously that a retirement account inherited from the debtor’s mother was not exempt under Section 522(b)(3)(C). The identical issue came to the Rhode Island Supreme Court in a certified question from the bankruptcy court.
Both the majority and the dissent in Rhode Island said the state exemption statute was clear and unambiguous. Curiously, they drew opposite conclusions from the same statutory language.
Before bankruptcy, the debtor’s mother died, leaving her an IRA with about $95,000. The debtor had deposited the funds into her own rollover IRA. The debtor selected state exemptions. In bankruptcy, she claimed the inherited IRA was exempt under state law.
The Rhode Island statute exempts an “individual retirement account . . . as defined in the Internal Revenue Code, 26 U.S.C. §§ 408 and 408(A) . . . .”
In a December 11 opinion by Justice William P. Robinson III, the majority of the state high court quickly decided that the statute was clear and unambiguous, leaving them no reason to divine the intent of the legislature.
Employing words of the state exemption statute, the majority found that an inherited IRA is “defined” in Section 408, thus making it exempt under state law. The majority saw no reason for “weighing policy arguments” when the statute is clear.
Still, the majority found Clark to have “possible relevance.” Although Clark was “certainly instructive,” they noted that the U.S. Supreme Court was interpreting a federal statute where the meaning of the term “retirement funds” was pivotal. No similar language appears in the Rhode Island statute, Justice Robinson noted.
Because the state statute was “clear and unambiguous,” the majority held that an inherited IRA is exempt under Rhode Island law. The majority therefore said they “need not and do not consider policy considerations such as those discussed in Clark.”
Chief Justice Paul Suttell dissented in an opinion by Justice Gilbert V. Indeglia. They too found the statute to be “unambiguous,” but they concluded that an inherited IRA is not exempt in Rhode Island.
The dissenters noted that the word “inherited” is not found in the state exemption statute. They were also persuaded by “the policy underlying such bankruptcy exemptions.”
Conceding that the federal statute uses different language, the dissenters observed that Section 522(b)(3)(C) also refers to Section 408 of the IRS Code. Nonetheless, the dissenters said, the U.S. Supreme Court ruled that inherited IRAs are not exempt.
While Clark was not binding on the state high court, the dissenters said that “Clark does speak to the underlying policy of excluding inherited IRAs from exemption in bankruptcy proceedings.”
According to the dissenters, the purpose of the statute is to provide a bankrupt debtor with a fresh start. In their view, exempting an inherited IRA gives the debtor a windfall, not a fresh start, and is therefore inconsistent with the intent of the legislature.
A 3/2 decision by the Rhode Island Supreme Court shows that an inherited individual retirement account, or IRA, can be exempt in bankruptcy under state law even though it would not be exempt under federal exemptions.
In Clark v. Rameker, 134 S. Ct. 2242 (2014), the Supreme Court ruled unanimously that a retirement account inherited from the debtor’s mother was not exempt under Section 522(b)(3)(C). The identical issue came to the Rhode Island Supreme Court in a certified question from the bankruptcy court.
Both the majority and the dissent in Rhode Island said the state exemption statute was clear and unambiguous. Curiously, they drew opposite conclusions from the same statutory language.
Before bankruptcy, the debtor’s mother died, leaving her an IRA with about $95,000. The debtor had deposited the funds into her own rollover IRA. The debtor selected state exemptions. In bankruptcy, she claimed the inherited IRA was exempt under state law.
The Rhode Island statute exempts an “individual retirement account . . . as defined in the Internal Revenue Code, 26 U.S.C. §§ 408 and 408(A) . . . .”
In a December 11 opinion by Justice William P. Robinson III, the majority of the state high court quickly decided that the statute was clear and unambiguous, leaving them no reason to divine the intent of the legislature.