Warren J. Reinhard and Michelle L. Reinhard

Docket 32, 34, 38, 39, 40.1
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF OHIO
EASTERN DIVISION
In re: ) Case No. 08-15357
)
WARREN J. REINHARD and ) Chapter 7
MICHELLE L. REINHARD, )
) Judge Pat E. Morgenstern-Clarren
Debtors. )
) MEMORANDUM OF OPINION
The debtor Michelle Reinhard claims as exempt from her chapter 7 estate assets from an
IRA that she inherited prepetition from her father. The trustee challenges the exemption. For1
the reasons stated below, the exemption is disallowed.
JURISDICTION
The court has jurisdiction under 28 U.S.C. § 1334 and General Order No. 84 entered by
the United States District Court for the Northern District of Ohio. This is a core proceeding
under 28 U.S.C. § 157(b)(2)(B).
ISSUE
May a debtor exempt an IRA inherited from a non-spouse from the bankruptcy estate
under Ohio Revised Code § 2329.66(A)(10)(c)?
FACTS
The parties stipulated to these facts:
Robert Dunn, the father of Michelle Reinhard, died on June 16, 2008. Mr. Dunn named
Michelle Reinhard as a co-beneficiary of his individual retirement account. About a month later,
Michelle and Warren Reinhard filed their chapter 7 case. Michelle Reinhard (the debtor) claimed
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Additional exemptions set out in § 522(b)(3)(B) and (C) are also available, but are not2
at issue here.
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as exempt an account described in her amended schedules as “Investment Centers of America,
Inc [IRA FBO [for the benefit of] Michelle Reinhard[,] Pershing LLC as Custodian B/O Robert
A. Dunn, Deceased].” There are no stipulations as to how this account was established or what
funds, if any, have been distributed from it. The IRA is valued at $44,405.95. The debtor did not
contribute any wages or personal earnings to the IRA and she is prohibited by law from making
any such contributions.
The debtor is 43 years old, married with three children, and works as a nurse.
11 U.S.C. § 522(b)
The filing of a bankruptcy case creates a bankruptcy estate that consists of all legal and
equitable interests of the debtor in property. 11 U.S.C. § 541(a). A debtor may exempt–or
remove–certain property from the estate so that the debtor has the means to make a fresh
economic start. See 11 U.S.C. § 522. For debtors who file in Ohio, exemptions are determined
under § 522(b)(3). See 11 U.S.C. § 522(b)(2) (permitting a state to opt-out of the federal
bankruptcy exemptions); and OHIO REV. CODE § 2329.662 (in which Ohio elects to opt-out).
Under § 522(b)(3)(A), a debtor may exempt property under Ohio law and under federal law other
than § 522(d). Exemptions are liberally construed in favor of the debtor. In re Peacock, 2922
B.R. 593, 595 (Bankr. S.D. Ohio 2002). A trustee, as an objecting party, has the burden of
proving that an exemption should not be allowed. FED. R. BANKR. P. 4003(c); Hamo v. Wilson
(In re Hamo), 233 B.R. 718, 723 (B.A.P. 6th Cir. 1999).
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OHIO REVISED CODE § 2329.66(A)(10)(c)
The relevant statute in this case is Ohio Revised Code § 2329.66(A)(10)(c). The statute
provides, with exceptions not applicable here, that a debtor may exempt:
(c) . . . the person’s right in the assets held in, or to receive any payment
under, any individual retirement account, individual retirement annuity, “Roth
IRA,” or education individual retirement account that provides benefits by reason
of illness, disability, death, or age, to the extent that the assets, payments, or
benefits described in division (A)(10)(c) of this section are attributable to any of
the following:
(i) Contributions of the person that were less than or equal
to the applicable limits on deductible contributions to an individual
retirement account or individual retirement annuity in the year that
the contributions were made, whether or not the person was
eligible to deduct the contributions on the person’s federal tax
return for the year in which the contributions were made;
(ii) Contributions of the person that were less than or
equal to the applicable limits on contributions to a Roth IRA or
education individual retirement account in the year that the
contributions were made;
(iii) Contributions of the person that are within the
applicable limits on rollover contributions under subsections . . .
408(d)(3) . . . of the “Internal Revenue Code of 1986,” 100 Stat.
2085, 26 U.S.C.A. 1, as amended.
Stated differently, a debtor may exempt (1) assets held in any IRA; (2) that provides benefits by
reason of illness, disability, death or age; (3) to the extent that the assets were “contributions of
the person,” (4) so long as the contributions are within the statutory limits.
THE POSITIONS OF THE PARTIES
The debtor did not establish the IRA, but instead acquired her interest in it when her
father died. As a result, the trustee takes the position that the account is an inheritance, not an
IRA. The trustee also contends that “contributions of the person” in the provisions of
§ 2329.66(A)(10)(c) must refer to contributions of the debtor. Because the debtor did not
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contribute anything to the account, the trustee concludes that the account may not be exempted
from the estate.
The debtor responds that under Ohio’s broad exemption statute, any IRA may be held
exempt, regardless of who established and contributed to it.
DISCUSSION
The parties have not cited any Ohio or Sixth Circuit law on the issue of whether assets in
an IRA inherited from a non-spouse may be claimed as exempt under Ohio law, and the court has
not found any in independent research. This appears, therefore, to be an issue of first impression.
Courts in other jurisdictions have analyzed this same issue based on the law of states
other than Ohio. Most have concluded that a debtor may not exempt an IRA inherited from a
non-spouse from the bankruptcy estate. See, for example, In re Jarboe, 365 B.R. 717 (Bankr.
S.D. Tex. 2007) (under Texas law, the debtor was not entitled to exempt an IRA inherited from a
non-spouse); In re Kirchen, 344 B.R. 908 (Bankr. E.D. Wisc. 2006) (under Wisconsin law, the
debtor was not entitled to exempt an IRA inherited from a non-spouse); In re Taylor, No. 05-
93559, 2006 Bankr. LEXIS 755 (Bankr. C.D. Ill. May 9, 2006) (under Illinois law, the debtor
was not entitled to exempt an IRA inherited from a non-spouse); In re Greenfield, 289 B.R. 146
(Bankr. S.D. Cal. 2003) (under California law, the debtor was not entitled to exempt an IRA
inherited from a non-spouse); In re Navarre, 332 B.R. 24 (Bankr. M.D. Ala. 2004) (under
Alabama law, the debtor was not entitled to exempt an IRA inherited from a non-spouse); and
In re Sims, 241 B.R. 467 (Bankr. N.D. Okla. 1999) (under Oklahoma law, the debtor was not
entitled to exempt an IRA inherited from a non-spouse); but see In re McClelland, No. 07-40300,
2008 Bankr. LEXIS 41 (Bankr. D. Idaho Jan. 7, 2008) (under Idaho law, the debtor was entitled
to exempt an IRA inherited from a non-spouse). Although both the debtor and the trustee cite
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The court cannot say definitively when the debtor in this case must begin to take3
distributions, if she has not already, because the parties did not stipulate to the operative facts.
The exact date is, however, not needed to resolve the issue before the court.
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some of these cases, they acknowledge that Ohio’s statute is worded differently than those of
other states and that the plain meaning of Ohio’s statute controls. In re McCashen, 339 B.R. 907,
911 (Bankr. N.D. Ohio 2006). For the reasons discussed below, the IRA at issue here clearly
falls outside of the Ohio exemption provision.
The starting point is to distinguish a traditional IRA from an inherited IRA. A traditional
IRA is intended to be a vehicle for individuals to save for their own retirements. To encourage
people to participate, the Internal Revenue Code provides tax benefits to the taxpayer, with the
exact benefits depending on the type of retirement vehicle selected by the individual. When the
owner of an IRA dies, the Internal Revenue Code permits the contents of the IRA to go to
someone other than the account owner’s spouse, in which case the distribution is referred to as an
inherited IRA. See 26 U.S.C. § 408(d)(3)(C). When an IRA is inherited by a non-spouse, the
inheriting individual may not roll over any amounts into or out of the IRA, may not make
contributions to it, and must begin to take distributions from it in a matter of years, regardless of
the individual’s health or age. See 26 U.S.C. § 408; 26 C.F.R. § 1.408-2(b)(7); IRS Publication
590 at 20 (2009). Under these provisions, the person’s right in the inherited IRA assets and to3
receive payments are not benefits provided “by reason of illness, disability, death or age,” as
required by Ohio Revised Code § 2329.66(A)(10)(c).
In addition, the debtor’s inherited IRA does not meet the contribution requirements of
§ 2329.66(A)(10)(c). As this case does not involve a Roth IRA or an education IRA, the
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relevant contribution requirements are those set out in § 2329.66(A)(10)(c)(i) and
§ 2329.66(A)(10)(c)(iii).
Section 2329.66(A)(10)(c)(i) provides that a person may exempt assets held in an IRA if
the “contributions of the person” come within certain statutory limits. The trustee says that
because the debtor did not make any contributions to the inherited IRA, the account does not
meet this requirement. The debtor argues that “the person” making the contributions can be
anyone at all. A plain reading of the statute favors the trustee’s interpretation. The statute says
that a “person” may exempt property if the contributions of “the person” fall within a stated
amount. The “person” referred to at the beginning of the sentence is certainly the debtor; there is
nothing to show that the legislature intended the word “person” to mean one thing at the
beginning of the sentence and another by the end. The use of the term person in this section
unquestionably refers to the person who made contributions to the IRA. The parties stipulated
that the debtor did not make any of the contributions to the account, which puts this account
outside of the exemption.
Alternatively, the court considers whether the debtor may exempt the assets in the
account under the theory that the assets were rolled over from one IRA to another. Reading the
Ohio statute with the Internal Revenue Code, this argument is unavailing. Internal Revenue
Code § 408(d)(3) applies to rollover contributions to an IRA. Under Ohio Revised Code
§ 2329.66(A)(10)(c)(iii), a person may exempt assets held in an IRA to the extent that the
person’s contributions to the IRA are within the applicable limits on rollover contributions under
various provisions of the Internal Revenue Code, including 26 U.S.C. § 408(d)(3). The latter
section states, however, that an inherited account is not subject to rollover treatment under
§ 408(d)(3)(C). As a result, even if the debtor’s decision to maintain the funds in an IRA could
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be viewed as a contribution within the meaning of the Ohio exemption law, the exemption is still
not available because the inherited account is not entitled to be treated as a rollover under the
Internal Revenue Code.
The debtor’s inherited IRA does not come within the provisions of Ohio Revised Code
§ 2329.66(A)(10)(c) and the debtor may not exempt it from her bankruptcy estate.
CONCLUSION
For the reasons stated, the trustee’s objection to the debtor’s claim of exemption in the
inherited IRA is sustained. A separate order will be entered reflecting this decision.
_______________________________
Pat E. Morgenstern-Clarren
United States Bankruptcy Judge
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