Arizona is one of only eight states that provides specific bankruptcy protection for inherited IRA’s. A.R.S. § 33-1126(B) explicitly protects any money or assets payable to any participant or beneficiary in a retirement plan which meets IRC requirements, “whether the beneficiary’s interest arises by inheritance, designation, appointment or otherwise.” Amounts contributed within 120 days of bankruptcy filing are not exempt. (A.R.S. § 33-1126(B)(2)).

In 2014, the United States Supreme Court ruled that funds in an inherited IRA account, where the IRA is not inherited through the death of a spouse, are not exempt under 11 U.S.C. § 522(b)(3)(C) because they do not qualify as “retirement funds” within the meaning of the statute. Clark v. Rameker, 134 S.Ct. 2242 (2014). In that case, the debtor sought to exempt IRA funds that were inherited from the death of her mother. The Supreme Court reasoned that while some investors may use inherited IRA funds for retirement purposes, to rule inherited IRA funds as “retirement funds” opens the door qualifying any moneys as “retirement funds” since they could potentially be used for retirement purposes. Such an interpretation is not allowable since it would “convert the bankruptcy objective of protecting debtors’ basic needs into a free pass.” Id.

In 2015, the United States Bankruptcy Court for the District of Arizona ruled that a debtor’s interest in a retirement account inherited from her late husband was exempt. The court ruled that while a debtor in an opt-out state may elect to take a federal exemption, nothing precludes debtors from taking the broader exemptions allowed under Arizona state law. The court determined that the Supreme Court’s ruling in Clark regarding inherited IRAs under 11 U.S.C. § 522 does not impact whether a debtor may exempt an inherited IRA under A.R.S. § 33-1126, whether or not they inherited it from a spouse.

In 2011, the United States Bankruptcy Court for the District of Arizona ruled that a debtor’s IRA that she inherited from her mother qualified as exempt retirement plan funds under A.R.S. § 33-126(B). In re Thiem, Bktcy Ct AZ, 1.19.2011. The Bankruptcy Court held that the inherited IRA would also be exempt under § 522, even though the state exemptions ultimately applied. In the alternative, the Bankruptcy Court ruled that IRA funds inherited by a death beneficiary are exempt under A.R.S. § 33-1126(A)(1).

The Supreme Court’s ruling supplanted the In re Thiem interpretation of the federal statute. However, the U.S. Supreme Court’s ruling in Clark did not specifically address whether conflicting state law prevents the result. Arizona opts out of the federal exemptions in favor of its own statutory exemption scheme. For those reasons, Arizona law protects inherited IRA funds from creditors, even when the plan beneficiary files for bankruptcy.

KEYWORDS: Inherited IRA, retirement funds, Arizona Bankruptcy Exemptions, property of the bankruptcy estate, A.R.S. Section 33-1126