In re Norris
| Decision Date | 20 May 2016 |
| Docket Number | Case No. 15–26458 CMG |
| Citation | 550 B.R. 271 |
| Parties | In re: Bridgette Norris, Debtor. |
| Court | U.S. Bankruptcy Court — District of New Jersey |
William H. Oliver, Jr., Esq., Attorney for Debtor
Trenk, DiPasquale, Della Fera & Sodono, P.C., Andrea Dobin, Esq., Chapter 7 Trustee
CHRISTINE M. GRAVELLE, U.S.B.J.
This matter raises the issue of whether an inherited individual retirement account, which names debtor, Bridgette Norris (“Debtor”) as beneficiary, constitutes property of the bankruptcy estate. In her schedules, which she amended twice, Debtor asserts both an exemption and an exclusion from her estate of her interests in pension funds, including an inherited IRA (the “Inherited IRA”). The Chapter 7 Trustee, Andrea Dobin (“Trustee”) objects to both assertions and requests a ruling that the Inherited IRA is property of the estate, which has not been properly exempted. For the reasons set forth below, the objection is denied and the Inherited IRA is deemed excluded from the bankruptcy estate.
The Court has jurisdiction over this contested matter under 28 U.S.C. §§ 1334(a) and 157(a) and the Standing Order of the United States District Court dated July 10, 1984, as amended October 17, 2013, referring all bankruptcy cases to the bankruptcy court. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A) and (B). Venue is proper in this Court pursuant to 28 U.S.C. § 1408. Pursuant to Fed. R. Bankr.P. 7052, the Court issues the following findings of fact and conclusions of law.
Debtor filed a Chapter 7 bankruptcy petition on August 31, 2015. Five months before the filing, Debtor's stepmother passed away, leaving the Inherited IRA naming Debtor as beneficiary. Schedules B and C, included with Debtor's initial filing, listed a “Pension 401K” as property of the estate and exempted it under 11 U.S.C. § 522(d)(12). The record is unclear whether the entry “Pension 401K” included the Inherited IRA.
The Trustee objected to the claimed exemption questioning whether Debtor was attempting to exempt the Inherited IRA. In response, Debtor amended Schedules B and C to specifically list the Inherited IRA with a value of $33,900, claiming it to be fully exempt under 11 U.S.C. § 522(d)(12). Debtor again amended her schedules, again listing the Inherited IRA, but this time claiming that the Inherited IRA was “[n]ot part of [the] Estate under in re: Yuhas and in re: Andolino,” (a reference to a Third Circuit opinion and a decision of the Bankruptcy Court of the District of New Jersey). Further, she continued to fully exempt the Inherited IRA under 11 U.S.C. § 522(d)(12).
At the initial hearing on this matter, the Court granted an adjournment to give the parties more time to provide and review documents. The Trustee subsequently filed a Notice of Assets in the case based on the Inherited IRA, and both parties have been given ample time to further brief this issue. After reviewing those briefs and the related oral arguments of the parties, the Court is prepared to rule.
The filing of a bankruptcy petition under Title 11 creates an estate comprised of “[e]xcept as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). The exception relevant here is subsection (c)(2), which states that, “a restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.” 11 U.S.C. § 541(c)(2).
The applicable non-bankruptcy law is N.J.S.A. 25:2–1(b) (the “Statute”), which provides that:
The Third Circuit held that the Statute operates to exclude IRAs from the bankrupt estate. See In re Yuhas, 104 F.3d 612 (3d Cir.1997). This exclusion must be distinguished from the exemption afforded to IRAs by the Code itself. See 11 U.S.C. § 522(b)(3)(c) (). The latter assumes IRAs are property of the estate, subject to the exclusion, while the In re Yuhas opinion effectively operates to prevent IRAs from ever becoming estate property. Because of the Statute and its application by the Third Circuit in In re Yuhas, the exemption afforded by the Code is not applicable to this Court's decision. Instead, our analysis must begin with the wording of the Statute itself, which includes trusts qualified and maintained pursuant to 26 U.S.C. § 408 of the Internal Revenue Code (the “IRC”).
Section 408 of the IRC defines an “individual retirement account” as “a trust” that is “created or organized in the United States for the exclusive benefit of an individual or his beneficiaries” and that meets the following requirements:
26 U.S.C. § 408(a). “IRAs that meet these requirements are said to be ‘qualified’ and receive favorable federal income tax treatment.” In re Yuhas, 104 F.3d 612, 613 (3d Cir.1997), citing 26 U.S.C. § 408(d), and (e).
The Third Circuit articulated a 5 part test to determine whether an IRA is excluded from the bankruptcy estate under section 541(c)(2) finding that:
In re Yuhas, 104 F.3d at 614. The In re Yuhas court focused on the fourth and fifth factors and examined the statutory definition of “transfer” under 101(54). The court held that “[a]ny procedure by which funds in an IRA might be reached to satisfy the ‘claims of creditors' (N.J.S.A.25:2–1(b) ) would seem to fall within this broad definition and thus constitute a ‘transfer’.” See In re Yuhas, 104 F.3d at 614–15. The Third Circuit concluded that N.J.S.A. 25:2–1(b) is a restriction on transfer. The “restriction” was clearly enforceable under the Statute, thereby satisfying the fifth factor.
The Third Circuit's discussion of the fourth and fifth factors for determining whether an IRA is excluded from a bankruptcy estate by operation of the Statute is equally applicable to inherited IRAs. Additionally, this Court is satisfied that first and second factors are satisfied. Though the Bankruptcy Code does not define the term “trust”, the Restatement defines it as “a fiduciary relationship with respect to property, subjecting the person by whom title to the property is held to equitable duties to deal with the property for the benefit of another person.” Restatement (Second) of Trusts § 2 (1987). The funds in the Inherited IRA represent Debtor's “beneficial interest” in the trust. Debtor was named as the beneficiary of her stepmother's IRA and, following her stepmother's death, placed the Inherited IRA with Mutual of America in an account titled “Individual Retirement Annuity Contract—Inherited.” The account is held in Debtor's name “as beneficiary of Rosalie Davis.” The Mutual of America annuity contract adopts the restrictions set forth in section 408 of the IRC. The first and second Yuhas elements are therefore present.
Thus, the only remaining issue for its inclusion under the Statute, and to satisfy the third Yuhas factor, is whether the Inherited IRA is “created or qualified and maintained under federal law.” Due to the different natures of an IRA and an inherited IRA, analysis beyond that which was performed by the In re Yuhas court is required to determine whether the change from IRA to inherited IRA also changes that asset's status as “qualifying” under the Statute.
Though the Third Circuit did not address inherited IRAs in In re Yuhas, section 408 of the IRC, as referenced in the Statute, includes inherited IRAs, stating:
To continue reading
Request your trial