Bankruptcy: IRA Accounts and Exemptions

     The United States Bankruptcy Court, in Smith v. Bryant, ruled that the debtor’s IRA funds were not excluded from the bankruptcy estate. In doing so, the Court examined and explained that there are significant differences between IRA's and ERISA-qualified retirement plans, the provision in Bankruptcy Code §541(c)(2) exempting qualified funds from the bankruptcy estate does not apply to the IRA funds in this case.

     In Smith the debtor, after her termination of employment from a bank, rolled over her interest in a stock and thrift plan at the bank into her own individual retirement account. The debtor argued that the IRA should have been excluded from her bankruptcy estate because the assets used to fund the IRA had been accumulated in an ERISA-qualified retirement plan.
     In reviewing the differences between ERISA-qualified retirement plans and IRAs, the Court noted that IRAs are subject to almost complete control by its owner and do not contain the same anti-assignation and non-alienation provisions required under ERISA-qualified plans. The Court stated that if the debtor had an interest in a trust that contained an anti-alienation provision that was created under Virginia law, such an interest would also be excluded from her bankruptcy estate under Bankruptcy Code §541(c)(2). Nevertheless, because the debtor created her IRA and had complete control over the funds in it, the funds were not exempt from the bankruptcy estate, and the debtor was ordered to turn the funds over to the trustee.
     The Court's ruling in Smith clarifies the issue regarding IRA accounts and exemptions, and with debtors frequently changing jobs, the issue is likely to resurface in many instances.