The issue on appeal was whether an inherited IRA continued to constitute "retirement funds" once the person for whose retirement they had been saved was no longer alive. The Court found that there were two elements to be satisfied: (1) whether the account contained "retirement funds"; and (2) whether the funds were exempt from taxation.
When an IRA is inherited, the beneficiary may receive the funds immediately, in which case they are recognized as ordinary income. Alternatively, they may be transferred to a new trustee. The account will still be in the name of the decedent and the beneficiary must begin receiving distributions within one year or withdraw the entire amount within five years.
Turning to the issue of whether the inherited IRA constituted "retirement funds," the Court noted that both parties' interpretations were reasonable. However, section (d)(12)'s relation to the other subsections of section 522(d) proved important. The other subsections of section 522(d) referred to the debtor's interest in property, but section 522(d)(12) did not.
The issue of inherited IRAs is presently pending before the Fifth Circuit Court of Appeals. The Eastern District of Texas reached the same result as Judge Smith in Chilton v. Moser, No. 4:10-CV-180 (E.D. Tex. 3/16/11). The case is pending before the Fifth Circuit as Case No. 11-40377, Chilton v. Moser. The case was argued before the panel on February 8, 2012.