4.4 IRAs; Insurance

Cts. & Jud. Proc. § 11-504(h) exempts IRAs and Roth IRAs regardless of value.   In In Re: Neil Solomon, M.D., 67 F.3d 1128 (4th Cir. 1995), the federal Court of Appeals held that an IRA was exempt and the debtor was not forced to consider non-mandatory withdrawals as potential income for Chapter 13 purposes.   In that case, Dr. Solomon was facing $160 Million in potential tort liability – much of it non-dischargeable under Chapter 7 because it arose from “willful and malicious injury by the debtor.”   The bankruptcy court denied a Chapter 13 plan, holding that the debtor needed to include as “disposable income” some part of his IRAs.   The Court of Appeals reversed.

Rousey v. Jacoway, 544 U.S. 320, 125 S.Ct. 1561 (2005), held that IRAs were covered under the federal exemptions of § 522(d)(10)(E) of the Bankruptcy Code.   Before Rousey there was an issue because IRAs are not ERISA plans.   The New Bankruptcy Act makes the federal IRA exemption explicit and adds a limit of $1 Million for IRAs (but no limit for 401(k)s; rollovers from 401(k)s, SEPs and SIMPLE-IRAs).   The $1 Million may cover IRAs under state exemptions when the state opted out of the federal exemptions (Maryland).   New Bankruptcy Act § 522(n).   There is ambiguity on this point.

Inherited IRAs, on the other hand, may be characterized as a self-settled trust and consequently not be protected under the general provisions of the exemption statute but regarded as reachable by the creditors of the beneficiary. Although there is no case on point in Maryland, this is the trend from bankruptcy cases nationally. See, for example, In re Kirchen, 344 B.R. 908 (Bankr. E.D. Wis. 2006) (holding that an inherited IRA was not an exempt asset under the state exemption statute because it was not a fund created by the debtor for his retirement) for a string citation of the jurisdictions not treating inherited IRAs as exempt assets under the applicable state law. For planning purposes, of course, it will be the law of the domicile of the beneficiary, not the original owner, that will control the result. One solution may be to make a “conduit” spendthrift trust that qualifies as a designated beneficiary under Treasury Regulation §1.401(a)(9)-4, A-5 the beneficiary rather than an individual.

The Maryland exemptions also include life insurance proceeds or proceeds from a annuity contract “on the life of an individual made for the benefit of or assigned to the spouse, child, or dependent relative of the individual … whether or not the right to change the named beneficiary is reserved or allowed to the individual.”   Ins. § 16-111 (“Proceeds Exempt from Creditors”).   “Proceeds” include death benefits, cash surrender value, loan value and dividends except if the debtor receives cash for these items.   Ins. § 16.111.