Does an annuity inherited by a spouse constitute “retirement funds” within the meaning of § 522(b)(3)(C)?

For the purpose of this blog, I am going to assume that the annuity in question would be exempt had the decedent been alive.

At first, I thought the answer was simple:

Assuming the annuity was a retirement fund to begin with, the answer is yes, it continues to be a retirement fund because under the IRC, an inherited retirement fund is NOT treated as “inherited” if the spouse is the person who inherited it. That is in 28 U.S.C. 408(d)(3)(C)(ii)(II), quoted for convenience:

(ii)Inherited individual retirement account or annuity An individual retirement account or individual retirement annuity shall be treated as inherited if—

     (I)the individual for whose benefit the account or annuity is maintained acquired such account by reason of the death of another individual, and
     (II)such individual was not the surviving spouse of such other individual.

Looking at Clark v. Rameker, the Court says, “If the heir is the owner’s spouse, as is often the case, the spouse has a choice: He or she may [1] “roll over” the IRA funds into his or her own IRA, or he or she may [2] keep the IRA as an inherited IRA (subject to the rules discussed below).” The parenthetical suggests that either one of two things must happen: the Debtor has gone with route [1] and the annuity is exempt or has gone with route [2] and it is not exempt.

Debtor may also have an argument that the annuity is community property to the extent the res in the annuity was funded by community funds and is therefore, at least half his even if title is completely in the wife’s name. I am not sure if this argument is persuasive.

To top it off, not all annuities are exempt! So the inquiry should start there.

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