Inherited IRA Exempt in Florida Bankruptcies

When an IRA owner dies and designates an heir, other than his spouse, as the beneficiary of his IRA the beneficiary acquires an “inherited IRA” from the decedent. Federal bankruptcy exemptions protect IRAs up to approximately $1 million. Some bankruptcy trustees have challenged the exemption of IRAs which the debtor inherited from a parent. Recently, the United States Supreme Court ruled that inherited IRAs are not exempt pursuant to the Bankruptcy Code’s exemption of IRA accountsThe Supreme Court decision held that the bankruptcy law is intended to exempt money that the debtor deferred from his own earnings to pay for future retirement. The court found that an inherited IRA, although called an “IRA”, is more of a windfall inheritance from a third party’s labors and savings, and this money should be made available to pay the debtor’s creditors. The court did not disturb the exemption of a rollover IRA  created by the debtor’s spouse.

This ruling does not affect bankruptcy debtors in Florida. Florida bankruptcy case apply exemptions set forth in Florida statutes rather than the federal default exemptions. The Florida legislature recently amended the state’s exemption statute 222.21 to specifically exempt inherited IRAs.

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