                            In the

United States Court of Appeals
              For the Seventh Circuit

Nos. 12-1241 & 12-1255

IN THE M ATTER OF:

   B RANDON C. C LARK and H EIDI H EFFRON-C LARK ,

                                                Debtors-Appellees.
A PPEAL OF:

   W ILLIAM J. R AMEKER, Trustee


           Appeals from the United States District Court
              for the Western District of Wisconsin.
           No. 11-cv-482-bbc—Barbara B. Crabb, Judge.



     A RGUED S EPTEMBER 6, 2012—D ECIDED A PRIL 23, 2013




 Before E ASTERBROOK, Chief Judge, and F LAUM and
W ILLIAMS, Circuit Judges.
  E ASTERBROOK, Chief Judge.    Congress has decided
that funds set aside for retirement need not be used
to pay pre-retirement debts. This policy is implemented
through 11 U.S.C. §522(b)(3)(C) and (d)(12), which ex-
empt retirement funds from creditors’ claims in bank-
ruptcy. This appeal presents the question whether a
2                                 Nos. 12-1241 & 12-1255

non-spousal inherited individual retirement account
(“inherited IRA” for short) is exempt.
  Section 522(b)(3)(C) and (d)(12) are identical. Each
exempts from creditors’ claims any “retirement funds
to the extent that those funds are in a fund or account
that is exempt from taxation under sections 401, 403,
408, 408A, 414, 457, or 501(a) of the Internal Revenue
Code of 1986.” An individual retirement account by
which a person provides for his or her own retirement
meets this requirement. If a married holder of an IRA
dies, the decedent’s spouse inherits the account and can
keep it separate or roll it over into his or her own IRA.
Either way, the money remains “retirement funds” in the
same sense as before the original owner’s death: the
surviving spouse cannot withdraw any of the money
before age 59½ without paying a penalty tax and must
start withdrawals no later than the year in which the
survivor reaches 70½. Because the money entered the
IRA without being subject to the income tax, all with-
drawals are taxed at ordinary rates.
   Different rules govern inherited IRAs. We illustrate
using the facts of this case. At her death, Ruth Heffron
owned an IRA worth approximately $300,000. Ruth’s
daughter Heidi Heffron-Clark was the designated bene-
ficiary. Ruth’s account passed to Heidi. It remains shel-
tered from taxation until the money is withdrawn,
but many of the account’s other attributes changed. For
example, no new contributions can be made, and the
balance cannot be rolled over or merged with any other
account. 26 U.S.C. §408(d)(3)(C). And instead of being
Nos. 12-1241 & 12-1255                                    3

dedicated to Heidi’s retirement years, the inherited IRA
must begin distributing its assets within a year of the
original owner’s death. 26 U.S.C. §402(c)(11)(A), incorpo-
rating 26 U.S.C. §401(a)(9)(B). Payout must be completed
in as little as five years (though the time can be longer
for some accounts). In other words, an inherited IRA is
a time-limited tax-deferral vehicle, but not a place to
hold wealth for use after the new owner’s retirement.
This statutory treatment allows the beneficiary to
avoid paying income tax immediately after the original
owner’s death (recall that money in a normal IRA is pre-tax
dollars; unlike assets that pass with a decedent’s estate,
the contents of an inherited IRA are taxable) while
limiting the duration of tax deferral. If recipients of in-
herited IRAs could hold the wealth until their own re-
tirement, tax deferral might become tax exemption,
as capital held in IRAs could pass down through the
generations without ever being subject to income tax.
  In the bankruptcy proceeding initiated by Heidi
Heffron-Clark and her husband Brandon Clark (“the
Clarks”), Bankruptcy Judge Martin held that an inher-
ited IRA does not represent “retirement funds” in the
hands of the current owner and so is not exempt under
§522(b)(3)(C) and (d)(12). 450 B.R. 858 (Bankr. W.D. Wis.
2011). The bankruptcy judge concluded that money
counts as “retirement funds” (a term that the Bankruptcy
Code does not define) only when held for the owner’s
retirement, while an inherited IRA must be distributed
earlier. A district judge reversed, 466 B.R. 135 (W.D.
Wis. 2012), adopting the view, first articulated in In re
Nessa, 426 B.R. 312 (BAP 8th Cir. 2010), that any money rep-
4                                 Nos. 12-1241 & 12-1255

resenting “retirement funds” in the decedent’s hands
must be treated the same way in successors’ hands. The
fifth circuit has since agreed with that approach, In re
Chilton, 674 F.3d 486 (5th Cir. 2012), observing that
§522(b)(3)(C) and (d)(12) refer to “retirement funds”
without providing that they must be the debtor’s. It is
enough, Chilton concludes, if they were ever anyone’s
retirement funds.
  Sometimes assets are exempt in bankruptcy because
of how they function in someone else’s hands. Suppose
Heidi Heffron-Clark were the trustee of a retirement
account for the benefit of her sister. Trustees are
legal owners of the assets they administer, but the
Clarks’ creditors could not reach retirement assets that
Heidi was holding as trustee. So we follow Chilton in
observing that exemptions in bankruptcy do not (neces-
sarily) depend on whether an asset is a retirement fund
(or an agricultural tool, or one of the other categories
of exemption) as the debtor uses it. But by the time the
Clarks filed for bankruptcy, the money in the inherited
IRA did not represent anyone’s retirement funds. They
had been Ruth’s, but when she died they became no
one’s retirement funds. The account remains a tax-
deferral vehicle until the mandatory distribution is com-
pleted, but distribution precedes the owner’s retirement.
To treat this account as exempt under §522(b)(3)(C) and
(d)(12) would be to shelter from creditors a pot of money
that can be freely used for current consumption.
  To see this, suppose Ruth had withdrawn the entire
$300,000 from her IRA, paying the penalty tax if neces-
Nos. 12-1241 & 12-1255                                   5

sary, waited a month, then given the money to Heidi.
The money would have been “retirement funds” while in
Ruth’s IRA, but not thereafter; in Heidi’s bank account
the money would be no different from any other assets
she could save or spend at will. And that would have
been true during the month Ruth banked the funds
before sending them to Heidi. Ruth’s creditors could
have reached the money, notwithstanding the fact that
it formerly was part of her retirement account. Why
should it make a difference whether the money passed
to Heidi on Ruth’s death or a little earlier? Either way,
the money used to be “retirement funds” but isn’t now.
We doubt that Chilton would think that money ex-
pressly withdrawn from an IRA retains its character
as “retirement funds.” Section 522(b)(3)(C) and (d)(12)
provides that the exemption depends on the conjunction
of tax deferral and assets’ status as “retirement funds”;
that an inherited IRA provides tax benefits is not enough.
  Chilton and Nessa give weight to the phrase “inherited
individual retirement account.” It includes the word
“retirement,” after all. True enough, but the “IRA” part of
“inherited IRA” (as the Internal Revenue Code uses the
phrase) designates the funds’ source, not the assets’ cur-
rent status. As we have observed, an inherited IRA
does not have the economic attributes of a retirement
vehicle, because the money cannot be held in the
account until the current owner’s retirement.
  Chilton and Nessa also give weight to the fact that
many of the other exemptions in §522 refer to “the
debtor’s” interests, while §522(b)(3)(C) and (d)(12) does
6                                  Nos. 12-1241 & 12-1255

not. For example, §522(b)(3)(B) exempts “any interest in
property in which the debtor had, immediately before
the commencement of the case, an interest as a tenant
by the entirety or joint tenant to the extent that such
interest . . . is exempt from process under ap-
plicable nonbankruptcy law”. This sort of language has
a temporal effect: what is exempt is the debtor’s tenancy
when the bankruptcy begins. A debtor who on the date
of filing has $100,000 in cash and no real property
cannot later invest the $100,000 in a joint tenancy and
then claim the property as exempt. Similarly a farmer
cannot buy new farm implements after filing for bank-
ruptcy and claim the acquisition as exempt. Section
522(b)(3)(C) and (d)(12) gives debtors a break by omitting
a temporal restriction: new value added to a retirement
fund during bankruptcy (an employer may continue
to make retirement contributions) is outside creditors’
reach, even though new real property and new farm
tools are not. But temporal differences in the way ex-
emptions work does not suggest that a pot of assets that
is not “retirement funds” any time during the bankruptcy
is exempt just because the debtor’s predecessor in
interest had saved for retirement.
   Consider a parallel situation. The Bankruptcy Code
provides a homestead exemption (subject to caps under
state law). So if Ruth had been living at home and had
filed for bankruptcy, some or all of the house’s value
would have been exempt from creditors’ claims. Section
522(b)(3)(A) implements this by exempting a “domicile”
in which the debtor lived for at least 730 days before
filing for bankruptcy. Suppose Heidi had inherited her
Nos. 12-1241 & 12-1255                                   7

mother’s house and rented it out. She could not claim
the property as exempt just because it used to be her
mother’s home; it would be exempt only if it had
been Heidi’s home for the two years before the Clarks’
filing. Exemption would depend on how Heidi used
the property, not how her mother used it. Just so with
retirement funds.
   At oral argument, the Clarks’ lawyer told us that
reading the Bankruptcy Code to exempt assets that for-
merly were someone’s retirement funds, but have never
been the debtors’ retirement funds, would encourage
people to save in order to make larger bequests to their
children. If parents know that anything in their IRAs
could be passed to their relatives free of creditors’
claims, they would save more and draw less from IRAs
during retirement. That’s true enough, but it does not
imply an atemporal meaning of “retirement funds.” One
could equally say that it would promote savings to
hold that any asset acquired from one’s relatives by
will, insurance, annuity, or survivorship designation is
exempt from creditors’ claims. That is not remotely what
§522 provides, however. It is always possible to get
more of whatever objective may have prompted a given
clause, but “no legislation pursues its purposes at all
costs. Deciding what competing values will or will not
be sacrificed to the achievement of a particular objective
is the very essence of legislative choice—and it frustrates
rather than effectuates legislative intent simplistically
to assume that whatever furthers the statute’s primary
objective must be the law.” Rodriguez v. United States,
480 U.S. 522, 525–26 (1987) (emphasis in original).
8                                   Nos. 12-1241 & 12-1255

Section 522(b)(3)(C) and (d)(12) does not throw creditors’
claims to the wolves in order to enhance the savings
and bequest motives. It provides a specific exemption
for retirement funds—and inherited IRAs do not
qualify, because they are not savings reserved for use
after their owners stop working.
   The district judge thought the question close and be-
lieved that close questions should be decided in debtors’
favor. We do not think the question close; inherited
IRAs represent an opportunity for current consump-
tion, not a fund of retirement savings. It is therefore
unnecessary to decide whether there is or should be
an interpretive principle favoring either side in a dispute
about the scope of an exemption, or whether any such
principle would depend on a combination of federal
law (for federal exemptions) plus state law (for state
exemptions), as in In re Barker, 768 F.2d 191, 196 (7th
Cir. 1985).
  The bankruptcy judge got this right. We disagree with
the fifth circuit’s decision in Chilton. Because our con-
clusion creates a conflict among the circuits, we cir-
culated the opinion before release to all judges in active
service. None of the judges requested a hearing en banc.
                                                 R EVERSED




                          4-23-13
