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Sometimes it's said that the bankruptcy code is filled with landmines. And to a certain
extent that's true and I want to go over one of those landmines and that's the IRA exemption.
The general rule of thumb is that the IRA's are exempt. And almost anything you read will
say don't worry about your IRA because it's exempt from the claims of creditors in bankruptcy.
But if you read the code though, what the code says is that if an IRA has received an
IRS determination letter then there is a presumption that it is exempt. And every lawyer knows
that there is a lot of danger in that word presumption because it immediately tells you
that there is some ways that it might not be exempt. And a good example of that is in
a recent case involving a Merrill Lynch IRA and there's approximately four or 500,000
dollars in this IRA. And the bankruptcy trustee in that particular case went into a boilerplate
language that Merrill Lynch has a customer sign when they open an IRA. And they found
in it language that to the extent that if that cusutomer were to owe Merrill Lynch money
on any other brokerage account for instance if there was a margin call on a brokerage
account that they had in their individual name, that Merrill Lynch could cover that
debt by taking money out of that IRA. The trustee successfully argued that that was
a prohibited transaction and therefore the IRA should not be exempt. And they won. And
they took it to the appellate court and they won again.
So a caution to everyone that has an IRA to go in and find out if the brokerage firm or
the sponsor of the IRA has any type of lien rights on the account and if they do you need
to move that IRA immediately.