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Michigan Bankruptcy – District Court Decides Stephenson – Says Inherited IRAs Fully Exemptable

Bankruptcy in Michigan Inherited IRAS.

Debtors Daniel and Janet Stephenson appealed an Order in their Ch. 7 bankruptcy to the U.S. District Court, Eastern District of MI, Southern Division.  The Standing Trustee’s objections to their claimed exemptions had been sustained. 
Among their assets, the Debtors listed three inherited IRAs, exempting them in full through the federal exemption available, Sec. 552(d)(12). 
Recently a 6th Circuit Bankruptcy Appellate Panel decided exemption guidelines.  Courts are to consider them “liberally in favor of debtor”, assigning the burden to “objecting parties to prove that an exemption is not validly claimed”, Schramm, 431 B.R.
The District Court analyzed whether inherited funds are “retirement funds”, then, if they are exempt from taxation. 
Concerning statute interpretation, the District Court is governed “by the language Congress used”, Lamie, 540 U.S.
Whereas 552(d)(12) exempts retirement funds, it does not require  such funds to be the debtor’s own, allowing for the consideration of inherited funds.  The Court concluded the Bankruptcy Court’s interpretation was too limited in scope. 
Under Sec. 408 of the Internal Revenue Code inherited IRAs are tax exempt, fulfilling a Sec. 522(d)(12) requirement for exemption consideration. 
Inherited IRAs do not lose their tax exempt status by virtue of their being directly transferred.
From there being an overwhelming weight of authority, including a comparable decision reversed in Chilton, the District Court reversed the Bankruptcy Court’s grant of the Trustee’s exemption objection.