Blogs

The 8th Circuit Court of Appeals has ruled that retirement funds rolled over from an Individual Retirement Account to purchase an annuity are exempt from the bankruptcy estate.  In re Miller (No. 13-3682).  Prior to filing bankruptcy, Joseph Miller, rolled over $267,319 from his IRA account to purchase an annuity contract from Minnesota Life Insurance Company.  The annuity was to pay the debtor $40,497.95 for the next 8 years.  Although it is clear that funds held in IRA accounts are exempt, the trustee argued that the funds lost that protected status when the annuity was purchased because the annuity did not meet the tax qualification rules of Internal Revenue  Code Section 408.
Section 522(b)(3)(C) of the Bankruptcy Code provides that funds which are exempt from federal taxation are thereby made exempt from the claims of creditors.  Such funds are not part of the “bankruptcy estate.”
The Chapter 7 Trustee in Miller argued that the rollover of funds from the IRA account exceeded the $6,000 annual premium limit imposed by IRC 408(b)(2)(A), and hence the fund were no longer exempt from taxation or protected in bankruptcy.  The 8th Circuit rejected this argument by pointing out that there is a difference between a “rollover contribution” and a “premium payment.”  The Court ruled that “a rollover contribution is distinct from a premium.”
In a similar case, the Massachusetts bankruptcy court also ruled that funds rolled over to an IRA annuity are exempt from the bankruptcy estate under 522(b)(3)(C).  In re LeClair, 461 B.R. 86 (Bankr. D. Mass. 2011).
Important facts about IRA Accounts in Nebraska Bankruptcy Cases:

• In addition to the federal retirement exemption statute of 522(b)(3)(C), Nebraska has its own exemption statute protecting retirement funds.  Neb. Rev. Stat. 25-1563.01.  So, if the federal exemption does not apply it may be possible to protect the retirement account under Nebraska’s law.
• Inherited IRA accounts are not protected in bankruptcy.
• IRA accounts which allow the debtor to borrow against the account may be at risk in bankruptcy.

If in Doubt file Chapter 13:
Sometimes it is difficult to determine if an account is exempt from federal taxation and, as a result, whether the account is protected in bankruptcy.  Debtors with sizable retirement savings simply cannot risk losing those funds in Chapter 7.  Keep in mind, Chapter 7 trustees are paid on commission–they earn bonus income if they uncover unprotected assets worth selling.  If there is any real doubt as to whether an retirement is account is protected in Chapter 7, the debtor is best advised to file for Chapter 13 and agree to pay back some of their debt over a 3 to 5 year payment plan. Chapter 13 trustees are not empowered to liquidate assets and payment plans are typically based on what a debtor can really afford to pay back.  If in doubt, file 13.
 
Image courtesy of Flickr and 401kcalculator.org

Trustee’s Meeting With Debtor Once your bankruptcy case is filed, the clerk of the United States Bankruptcy Court will send a notice of your upcoming 341 meeting of creditors. The notice will be sent to all creditors, the debtor and the debtor’s attorney. This meeting of creditors is an opportunity for the panel trustee to+ Read More
The post In Anticipation Of Your Meeting Before The Bankruptcy Trustee appeared first on David M. Siegel.

Credit Score Concerns Everybody is concerned with their credit score these days. Everybody wants to rebound as quickly as possible after a bankruptcy case. A better credit score will indicate that you are a better risk for future credit opportunities. The interest rate that you can garner will be better if your score is better+ Read More
The post Credit Bureaus Should Reflect Payments For Non-Reaffirmed Mortgage Debt appeared first on David M. Siegel.

Here at Shenwick & Associates, as part of our bankruptcy, creditors' rights and asset protection planning practice, we get many questions about spendthrift trusts.

A spendthrift trust is a trust that is settled for the benefit of a person (usually a person who is believed to be unable to control his or her spending) that gives a trustee authority to make decisions as to how the trust funds may be spent for the benefit of the beneficiary. In this post, we are specifically not discussing trusts that are self–settled (where the grantor/settlor is also the beneficiary). Creditors of the beneficiary generally (but with exceptions, discussed below) cannot reach the funds in the trust, and the funds are not actually under the control of the beneficiary.

To qualify as a spendthrift trust, the trust agreement should generally include a spendthrift provision–a provision that creates an irrevocable trust preventing creditors from attaching the interest of the beneficiary in the trust before that interest (cash or property) is actually distributed to him or her. Also, the trust agreement should not provide for mandatory distributions to beneficiaries (which allows the accumulation of income), but should provide for distributions at the discretion of the trustee. However, once a distribution is made from the trust to the beneficiary, creditors can attach that distribution.

In New York, there are two ways a creditor can attach the income a beneficiary receives from a trust. One way is via § 7-3.4 of the Estates, Powers and Trust Law, which provides that if a trust doesn't provide for accumulation of income (i.e. all income from the trust must be distributed at least annually), then a judgment creditor can reach all of the income due the beneficiary in excess of the amounts required for his or her education and support.

The other way is through § 5205(d) of the Civil Practice Law and Rules (CPLR). This section of the CPLR governs personal property exempt from the satisfaction of money judgments. Subsection (d) provides that a creditor can reach 10 percent of the income interest of a trust. However, if a court determines that the reasonable needs of the beneficiary and his or her dependents can be met by less than 90 percent of the trust income, then a greater percentage of the income can be reached by the creditors.

In a Florida bankruptcy case that applied the provisions of the CPLR to a New York spendthrift trust, the bankruptcy court took into account the beneficiary's total income and support from all sources, held that half of the trust income was unnecessary to meet the reasonable needs of the debtor and her dependents and concluded that such income could therefore be reached by the beneficiary's creditors.

In bankruptcy, spendthrift trusts are exempted under § 541(c)(2) of the Bankruptcy Code, which provides that "[a] restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable non-bankruptcy law is enforceable in a case under this title." So if a spendthrift trust is validly created pursuant to applicable state or federal (i.e. qualified retirement plans) law, then the spendthrift trust will not be property of a debtor's bankruptcy estate and not be subject to reach by creditors or the bankruptcy trustee.

To learn more about spendthrift trusts or protecting your assets from creditors both inside and outside of bankruptcy, please contact Jim Shenwick.