Look out, the Supremes are out to get ya!!!!

[mickeyd]

The U.S. Supreme Court on June 7 agreed to decide whether a married couple's individual retirement accounts (IRAs) are protected from bankruptcy proceedings.

At issue in Rousey v. Jacoway (No. 03-1407) is an exemption in the Bankruptcy Code for "stock bonus, pension, profit sharing, annuity or similar plans or contracts," to the extent that the assets are reasonably necessary for the debtor's support. Whether an IRA is a plan similar to a pension, profit sharing or annuity plan has been debated by federal appeals courts. According to the 8th Circuit appeals court in Rousey, IRAs that are rolled over from ERISA-qualified plans into new IRAs are less like exempt retirement plans and more like non-exempt bank savings accounts with favorable tax treatment. Consequently, they are not exempt from creditors in bankruptcy.

A ruling in the case -- which may affect up to the one-third of U.S. households that have traditional IRAs -- is expected in the fall term.

Whenever the supremes start to mess with my IRA $, I get real nervous. :-/

 

[Martha]

This is a big issue in bankruptcy court in the 8th circuit. Basicallly, to be exempt, payments you receive from the retirement plan/contract must be "on account of illness, disability, death, age or length of service". The problem with IRA's is that you can take out all the money at any time, you just will have to pay a tax and a penalty. Therefore, the payments are not necessarily on account of illness, disability, death, age or length of service.

I hope the Supreme Court overrules the 8th circuit decision. Right now if you live in the eighth circuit your IRA is likely vulnerable to creditors. My opinion is that the bankruptcy courts and the 8th circuit in upholding their decisions were being a little too clever. This is what strict constructionism gets us.

This is the board for the association of bankruptcy lawyers isn't it?

Martha

 

[Michael]

Right now if you live in the eighth circuit your IRA is likely vulnerable to creditors.

In Ohio, state law specifically protects IRAs from creditors. We live in the 6th circuit's jurisdiction, but I am wondering if the Supreme Court is considering any issues that would over turn Ohio law.

 

[Martha]

There are two separate sets of laws which govern what might be exempt from creditors. Each state has their state exemptions and the federal government has bankruptcy exemptions. If no bankruptcy is filed, the state's exemption law applies. If a bankruptcy is filed, then the debtor can choose to have the state exemptions and unless the state opts out of the federal exemptions, the debtor can alternatively choose the federal exemptions.

The Rousey case deals with the federal exemptions and specifically the one for non-ERISA retirement plans. Different circuit courts have come to different conclusions as to whether an IRA is exempt under the federal exemptions. The 8th circuit said no because of the unfettered discretion to withdraw from the IRA at any time subject only to withdrawal tax penalties. Some other circuits have said this is inconsistent with the purpose of the exemption statute. Because there is inconsitency among the federal courts, the Supreme Court has taken the case.

The Supreme Court will not effect state exemptions for retirement plans such as IRAs except indirectly. Often, the state retirement plan exemption mirrors the federal retirement plan exemption. Therefore, there is some chance that a state supreme court would use a similiar interpretation of their state law to find that their state exemption does or does not really cover IRAs.

I don't know how Ohio drafted its exemption so it is hard to tell whether there is a risk that IRA's may not be exempt under Ohio state law.

Martha

 

[Martha]

OK, I couldn't resist the urge to look up Ohio's exemption statute, section 2329.66 of the Ohio statutes. This part deals with IRAs:

"(c) Except for any portion of the assets that were deposited for the purpose of evading the payment of any debt and except as provided in sections 3119.80, 3119.81, 3121.02, 3121.03, and 3123.06 of the Revised Code, the person's right in the assets held in, or to receive any payment under, any individual retirement account, individual retirement annuity, "Roth IRA," or education individual retirement account that provides benefits by reason of illness, disability, death, or age, to the extent that the assets, payments, or benefits described in division (A)(10)(c) of this section are attributable to any of the following:

(i) Contributions of the person that were less than or equal to the applicable limits on deductible contributions to an individual retirement account or individual retirement annuity in the year that the contributions were made, whether or not the person was eligible to deduct the contributions on the person's federal tax return for the year in which the contributions were made;

(ii) Contributions of the person that were less than or equal to the applicable limits on contributions to a Roth IRA or education individual retirement account in the year that the contributions were made;

(iii) Contributions of the person that are within the applicable limits on rollover contributions under subsections 219, 402(c), 403(a)(4), 403(b)(8), 408(b), 408(d)(3), 408A(c)(3)(B), 408A(d)(3), and 530(d)(5) of the "Internal Revenue Code of 1986," 100 Stat. 2085, 26 U.S.C.A. 1, as amended."

This is not legal advice but only personal opinion which must be taken with a grain of salt since I am not an Ohio lawyer, but this statute seems very different from the federal exemption dealing with retirement plans and much broader than most states' retirement exemptions. Therefore, it is unlikely the Supreme Court decision is going to effect Ohio's exemption.
.

 

[unclemick]

Duh - I really hate to ask - but what about litigation other than bankrupcy - as in Tort.

 

[Michael]

Therefore, it is unlikely the Supreme Court decision is going to effect Ohio's exemption.

Thank you.

 

[Bob_Smith]

A few more questions for whoever knows:

--Are some IRAs ERISA qualified and others not ERISA qualified? The original post seems to suggest this.

--Are all 403(b)/401(k) plans ERISA qualified?

--I've been reluctant to roll over my 403(b) to my IRA due to confusion about this issue. Getting a better handle on this issue is on my "to-do" list, but it's tough to find definitive information I can understand. Any clarification would be appreciated. In other words, what can I do to best protect my assets?

 

[Bob_Smith]

Just tripped onto this article. It's a pretty straightforward explanation. I think I'll leave my 403(b) alone until it all shakes out.

http://askmerrill.ml.com/res_article/1,2271,18825,00.html

 

[Martha]

On UncleMick's question, if you are sued in a tort case and lose, you have some options. If you don't file bankruptcy you can claim exempt from the creditor what ever your state law allows. There are wide, wide variations among the states as to what they exempt from creditor claims. For example, Texas and Florida are noted for their generous homestead exemption. Other states are stingy. In Wisconsin you and your spouse together can claim only up to 40,000 in equity in your home. Other states allow even less. There are a variety of other miscellaneous exemptions, usually with dollar limitations. For example, most states exempt some household goods, a car, and some benefit plans, such as certain retirement plans. Also, whether or not you file bankruptcy, federal law protects ERISA plans. As a prior poster noted, IRA's do not fall within that category. Therefore, if you don't file bankruptcy, your own state law will have to be consulted to see if the IRA is exempt. Federal law also protects social security from creditors, whether or not you file bankruptcy.

If you do file bankruptcy and file "chapter 7" or liquidation bankruptcy, you have the option of taking your state's exemptions and in some cases, you can alternatively choose a federal set of exemptions. States are allowed to opt out of the federal exemptions and not allow you that choice. However, most states let you choose either the state or federal exemptions. Even if your state opts out, under separate federal laws, the ERISA plans and social security are exempt.

The federal set of exemptions allow you to claim a small amount of equity in you home, and a variety of miscelleanous assets, most all with dollar limitations. The federal exemptions are advantageous to those who don't have homes because there is a "pour-over" exemption which allows you to exempt a certain dollar amount of assets that don't fall within a specific exempt category. The dollar amount changes from time to time. The federal exemptions also have a retirement plan/contract exemption. This is what is dealt with by the Rousey court which held that IRAs don't fall within that exemption.

However, Under ERISA, a separate statute from the bankrutpcy statute, ERISA plans, such as 401ks are not subject to claims of general creditors.

As the article discussed above mentions, the ERISA protections do not apply to the government collecting taxes and does not apply in divorce court.

Under the current state of the law, I would not convert an ERISA protected plan to an IRA. Even if you are in a state that protects IRAs, such as Ohio apparently does, who knows where you might be living in the future.

Again, my personal opinion, not legal advice to anyone.

Martha

 

[Michael]

Under the current state of the law, I would not convert an ERISA protected plan to an IRA. Even if you are in a state that protects IRAs, such as Ohio apparently does, who knows where you might be living in the future.

In my case, I didn't have a choice. My ex employer went chapter 7, and their 401k was eliminated. I am happy about Ohio's protection, and will keep in mind that some states don't offer protection if I decide to move in the future. Thank you again for your opinion on this matter.

 

[charlie]

What if one converted his IRA to an immediate annuity.
Woud the income stream be exempt from bankruptcy?

Cheers,

Charlie

 

[Martha]

On the annuity issue, each state's exemption laws have to be consulted to see if it is exempt unless you are taking the federal bankruptcy exemptions. If you are taking the federal exemptions, the same exemption applies to annuities as to IRAs. The annuity payments would have to be on account of illness, disability, death, age, or length of service and are exempt only to extent reasonably necessary for support.

The Supreme Court decision on IRAs should provide some guidance on annuities as well.

Martha

 

[Bob_Smith]

Martha, where does one find their state's exemption laws? I don't even know where to begin looking for Iowa's. Thanks.

 

[haha]

Again, my personal opinion, not legal advice to anyone.

Martha

Martha, you are a real Ace. Thanks for such helpful and well informed posts.

Mikey

 

[John Galt]

My first real girl friend was a Martha. She died in her 20s. Do it today folks!

John Galt

 

[Martha]

Before I take Galt's suggestion and let this thread die, if you want to look up your own state's laws, one good source is www.findlaw.com. Go to the section for legal professionals and then go to browse by state.

OK I'll shut up now.

Martha

 

[unclemick]

Martha

Don't go away - the cheap ones around here charge $ 160/hr and up for legal consultation.

 

[Bob_Smith]

Before I take Galt's suggestion and let this thread die, if you want to look up your own state's laws, one good source is www.findlaw.com.  Go to the section for legal professionals and then go to browse by state.  

Thanks Martha!

 

[BigMoneyJim]

Before I take Galt's suggestion and let this thread die, [. . .]

OK I'll shut up now.

If I read you and John Galt right I think you misunderstood his statement.:

My first real girl friend was a Martha. She died in her 20s. Do it today folks!

I took it as another one of his "tomorrow is promised to no one" statements (i.e. we could all die tomorrow) so enjoy today. If I read you right you took it as a personal attack. Don't go away, you're contributions are highly valued!

 

[John Galt]

Hello BigMoneyJim.....................you got it right. The last thing I wanted was for Martha to go away. I was going to explain (my post) but then I thought maybe Martha was making
a subtle joke.

John Galt

 

[Martha]

The weird thing for me on this particular thread is that I am anxiously awaiting early retirement and I have really tired of practicing law for a living. Next year I will be part time and then will likely phase out totally a year or so later. However, it is fun to give my imput on the legal related questions and doesn't feel like work at all. I think I really like "the law" but don't like to work. If that makes any sense.

Martha

 

[John Galt]

Hi Martha. Makes perfect sense to me (being tired of
practicing law). Two (2) of my best friends used to
be my attorneys (having lunch with one of them today).
They both quit practicing law in mid career. One guy
is quite wealthy and he settled in to managing his family's money. The other owns 3 smaller businesses
(2 are manufacturing) and seems quite happy with it.
Neither of these guys are candidates for early
retirement. We have discussed it and they see no
reason to ER as they are enjoying what they do now.
I recall one of them said (when he quit),
"Whither I goest I know not!" A third friend
(old fishing buddy) didn't quit law, but switched from
his own practice to corporate law for a big company. I can't
be sure, but I suspect he basically sat on his ass until
he retired about 3-4 years ago.

John Galt

 

[BigMoneyJim]

However, it is fun to give my imput on the legal related questions and doesn't feel like work at all. I think I really like "the law" but don't like to work. If that makes any sense.

It makes perfect sense to me. It reminds me a bit of a paralegal running the site http://www.groklaw.net/ . As far as I know she isn't getting paid for that site except for paying subscribers (who pay just to encourage her to keep running it). Her topic of interest is free software licensing, software patents and other IP topics affecting the free software community. Many of the articles of late stray into tangents about parties involved in IP suits. What's really intriguing aside from her paralegal analysis is the information she gets from readers of the site; fans of the site will attend court sessions and give reports before the court documents are released.

A bit off topic, but the concept of researching legal issues of interest to you and having a helpful and appreciative audience might give you some ideas for retirement hobbies.

 

[John Galt]

Man, BigMoneyJim, that sounds interesting. I could write
a book (or maybe several) about my experiences with
the legal system, etc. I suppose being naturally
confrontational has helped me pile up my wealth of
stories, anecdotes, and tangled situations.

John Galt