Inherited IRAs Qualify as Exempt

On May 31, 2011, the Florida Legislature amended Florida Statute § 222.21 to clarify its intent as to the exempt status of an inherited Individual Retirement Account (“IRA”). The amended legislation was said to be in response to the recent opinions in Robertson v. Deeb, 16 So.3d 936 (Fla. 2d DCA 2009) and In re Ard, 435 B.R. 719 (Bankr. M.D. Fla. 2010) which held that inherited an IRA was not exempt.

Prior to the May 31, 2011 amendment, the Robertson court held that an inherited IRA was a separate account from the original IRA and was not exempt for garnishment. In Ard, the bankruptcy court in the Middle District of Florida found the Robertson opinion compelling and held that an inherited IRA that a chapter 7 debtor acquired following the death of her father was property of the bankruptcy estate. Both the Robertson and Ard courts focused their attention on the language of the old statute, which stated that the exemption only ran to “one particular fund or account,” and since the inherited IRA is a new, or separate account, the exempt status is lost. Further, the courts looked to the change in the character of the IRA from the original settlor to the beneficiary of the inherited IRA. Ard, 435 B.R. at 719-22.

In amending Florida Statute § 222.21, it is apparent that the Florida Legislature’s intent was to afford all beneficiaries of these tax exempt instruments the same level of protection under state law as is afforded under federal law. While under federal law there are some differences in the treatment of an IRA and an inherited IRA, the interest of the beneficiary in the inherited IRA remained tax exempt until distribution of the assets being held in that fund are made.

The amended Florida Statute § 222.21(2)(c) now reads:

Any money or other assets or any interest in any fund or account that is exempt from claims of creditors of the owner, beneficiary, or participant under paragraph (a) does not cease to be exempt after the owner’s death by reason of a direct transfer or eligible rollover that is excluded from gross income under the Internal Revenue Code of 1986, including, but not limited to, a direct transfer or eligible rollover to an inherited individual retirement account as defined in s. 408(d)(3) of the Internal Revenue Code of 1986, as amended. This paragraph is intended to clarify existing law, is remedial in nature, and shall have retroactive application to all inherited individual retirement accounts without regard to the date an account was created.

Based upon the Florida Legislature’s amendment to Florida Statute § 222.21, an individual beneficiary of an inherited IRA will now be able to exempt their interest from garnishment, or in the case of a bankruptcy filing, from becoming property of the bankruptcy estate.