Take-Away: IRAs are exempt from creditor claims under Michigan’s exempt property statute. Unlike other states, Michigan’s statute is silent when it comes to protecting inherited IRAs. It is possible, though, that distributions from an inherited  IRA will also be exempt from creditor claims under Michigan’s statute.

Background: As has been covered in the past, (admittedly on more than one occasion)  Michigan, like many other states, exempts IRAs, both traditional and Roth IRAs, from creditor claims by statute.

MCL 600.6023(j):The following property of a judgment debtor and the judgment debtor’s dependents is exempt from levy and sale….An individual retirement account or an individual retirement annuity as defined in section 408 or 408a of the Internal Revenue Code and the payments or distributions from the account or annuity.

Inherited IRA Not Covered: Note that this statute does not expressly cover inherited IRAs, unlike many other state’s exempt property statutes.

‘Property of a Judgment Debtor’: An individual beneficiary who inherits an IRA owns the IRA. Thus, that inheritor would seem to fall within the description of a ‘the following property of a judgment debtor.’

Distributions Protected: The highlighted portions expressly protects distributions from the retirement account from creditor claims. A reasonable interpretation of this statute could also apply to an inherited IRA, even though the Michigan exempt property statute does not expressly protect inherited IRAs from creditor claims.

Clark v. Rameker: Then we have this 2014 US Supreme Court case which held that an inherited IRA is not entitled to the federal bankruptcy exemption for retirement plan assets, finding that the inherited IRA is not a retirement plan within the meaning of that federal statute. This federal case, if exended to Michigan’s statute, would suggest that an inherited IRA under Michigan’s exempt property statute, is not a retirement account, rather just a tax deferred account. Thus, this federal court decision could easily affect the scope of protection otherwise afforded under the broad language used in Michigan’s exempt property statute.

Tracing: While I could find nothing in Michigan case law with regard to whether the protection afforded an IRA ‘wrapper’ disappears once the funds have left the IRA (admittedly a cursory search was made by me), tracing is permitted in some other states which also expressly exempt IRAs from creditor claims.

Florida Cases:  I found a couple of Florida decisions from the early 2000’s that held that even after funds have left the IRA through a distribution, those traced funds retain the protection of Florida’s exempt property statute. Those Florida decisions [Hickox and Ladd] held that as long as the IRA ‘owner’ [note, not inheritor]  can trace the assets back to the retirement account from which they were distributed, those assets will continue to be treated as exempt property under Florida’s exempt property statute, and thus the assets are not available to satisfy a creditor’s judgment.

Commingling: However, in a couple of more recent Florida court decisions [Maxwell, Jones, and Universal Physician’s] the courts were not quite as ‘benign’ with their interpretation of Florida’s exempt property statute. These more recent court decisions held that once assets are distributed from the retirement account, if they are commingled with other assets, e.g. the distribution from the IRA is deposited into a checking or savings account, even if traceable, those funds are no longer exempt under Florida’s exempt property statute.

It should be noted that Florida’s exempt property statute expressly includes within its protection inherited IRAs, unlike Michigan’s statute which is silent as to the intended protection for an inherited IRA.

Voluntary vs Mandatory Distribution: From these more recent Florida decisions it appears that a court will look at a number of factors when tracing distributions to determine if the post-IRA distribution assets are protected by Florida’s exempt property statute. These decisions appear to focus on  whether the distribution taken from the IRA was either voluntary or mandatory, i.e. a required minimum distribution (RMD) that is taken to avoid the federal 50% penalty-excise tax for the failure to take a required minimum distribution. [IRC 4974(a); Regulation 54.4974.]

SECURE Act: The question of whether the distribution from the IRA is voluntary or mandatory becomes significant under the SECURE Act. Because of the SECURE Act’s 10-year payout rule, there is no required minimum distribution under the SECURE Act for an inherited IRA until the last day of the 10th year. However, many IRA beneficiaries will want to be able to withdraw from  their inherited accounts sooner in staged distributions for income tax planning in order to avoid bunching that taxable income into a single tax year.

Because of this change created by the SECURE Act with no more RMD for most designated beneficiaries, Florida’s bar is studying the need to update its exempt property statute to address distributions from IRAs, both by the IRA owner and by the designated beneficiary of a decedent’s IRA.

Practical Observation: Because Florida courts seem to focus on commingling distributions from an IRA with other assets, it would make sense to open a separate account to receive any distributions from an IRA, either due to RMDs taken by its owner, or by the inheritor of the IRA.

Conclusion: It is possible to reasonably interpret Michigan’s exempt property statute to protect inherited IRAs from creditor claims. This protection could also extend to distributions from an inherited IRA. Given recent Florida court decisions, it would be wise to deposit any distributions taken from an IRA, either by its owner or inheritor,  into a segregated account that only holds the IRA assets so that tracing is easily accomplished and the retirement funds are not commingled.