Consider Retirement Assets When Bankruptcy Looms

On October 21st, I posted a blog on the following case: In re: Brian A. Lerbakken v. Sieloff and Associates, P.A., No. 18-6018, United States Bankruptcy Appellate Panel For the Eighth Circuit. Oct. 16, 2018 (“Lerbakken”).   In Lierbakken, the Court held that the Debtor could not claim bankruptcy exemptions in a Wells Fargo 401K and an IRA account that Debtor received from his ex-wife as part of a property settlement.

Lerbakken relied on the 2014 Clark v. Rameker Supreme Court case that held that inherited IRAs were not exempt from creditors in bankruptcy.  Like the debtor in Clark, the debtor in Lerbakken (1) could not contribute additional funds to the qualified plan account, and (2) would not be subject to a 10% penalty on early withdrawal.  Therefore, the debtor’s account could not be exempt as a “retirement account.”  A “retirement account,” as the Court in Clark defined it, must incentivize contributions over time in order to save toward retirement.  The plans in Clark and Lerbakken did not meet that definition.

But, is there a workaround?  Sandra G. Glazier, an equity shareholder at Lipson Neilson, P.C. in its Bloomfield Hills, Michigan office, suggests that there is.

“Perhaps,” she said, “the outcome would have been different had the debtor in Lerbakken made a tax-free distribution to a rollover IRA in the debtor’s own name prior to bankruptcy. Once qualified plans are rolled over to an IRA, such IRAs are then subject to early withdrawal penalties and that account holder may make additional contributions.”

LISI Asset Protection Planning Newsletter #378, (January 2, 2019) at Copyright 2019 Leimberg Information Services, Inc. (LISI).


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