Inherited retirement accounts are difficult to exempt and the analysis is complex. There is, however, an applicable exemption under Arizona Revised Statutes. Using federal exemptions, an inherited account is not exempt (See Clark v. Rameker 134 S.Ct. 2242, 189 L.Ed.2d 157 (2014)). Fortunately, 11 U.S.C. § 522(b)(3)(C), does not preempt the application of Arizona Revised Statute § 33-1126(B).

The doctrine of federal preemption applies to invalidate state statutes to the extent they are inconsistent or contrary to existence and purposes of existing federal law. With inconsistent bankruptcy exemptions (between federal and state statutes), a Debtor must overcome the federal holding in the Clark case. This argument is simple. Courts have already concluded that “federal bankruptcy law is not so pervasive, nor is the federal interest so dominant, as to wholly preclude state legislation in the area” (See citation in Sherwood Partners, Inc. v. Lycos, Inc. 394 F.3d 1198, 1201 (9^th Cir.2005)). This is overtly evident with Congress expressly authorizing a State to “opt out.” Supporting this contention, the Court has stated “nothing in §522 expresses an intent to occupy the field or otherwise restrict a state from providing a state exemption for a retirement fund” (See In Re Pacheco 537 B.R. 935 (2015)).

Courts have held §522(b)(3)(C) is available to all debtors regardless of whether the debtor’s particular state has opted out of the federal exemptions (See In re Hamlin, 465 B.R. 863, 870-71 (9^th Cir. BAP 2012). In addition, the legistative policy behind §522(b)(3)(C) is to expand the bankruptcy protection of retirement accounts, not restrict.

The problem with “inherited” retirement accounts is that they do not fit within the definition set forth by U.S.S.C., which uses the ordinary meaning as “sums of money set aside for the day an individual stop working” (See Clark v. Rameker 134 S.Ct. 2242, 189 L.Ed.2d 157 (2014)). The Clark court concluded that the holder of an inherited account has no ability to contribute new money and has the ability to withdraw the funds without penalty, which is inconsistent with the purpose of a retirement account. In addition, the funds are no longer set aside for the day an individual ends working. Finally, the court held that a windfall of inherited funds to a debtor is not necessarily consistent with an exemption’s purpose of protecting a Debtor’s basic needs.

Under Arizona exemptions, A.R.S. § 33-1106(B) expressly provides an exemption in inherited funds. The exemption requires that the retirement plan be established under the sections of the Internal Revue Code. Any funds payable in a retirement plan under one the enumerated sections of the internal Revenue Code qualifies as exempt. Interestingly, a 401(k) plan, which is not mentioned in the Arizona exemption, is still exempt as a fund subset of §401(a) (See 26 I.R.C. 401(k)). Inherited funds must be pre-tax dollars and contributed into a “qualified” plan. The requirements for qualification are set forth under Internal Revenue Code Section 401(a). It’s noteworthy, that inherited funds in Arizona were exempt even before the amendments were made to A.R.S. § 33-1106(B) to expressly mention “inherited” (See In re Thiem 443 B.R. 832 (Bankr.DAriz.2011).

Based on the amended language of A.R.S. § 33-1106(B) and the holding in In Re Pacheco, an inherited retirement account can be exempted in Arizona. As a disclaimer, this information should be used very carefully with the assistance of counsel. Especially, if a debtor has such an account and decides to proceed with filing a consumer bankruptcy in Arizona.