By Pension and Benefits Editorial Staff
A debtor’s share of the value in his ex-wife’s 401(k) account and an IRA account, received by the debtor as part of a marital property settlement, are not “retirement funds” for purposes of the Bankruptcy Code and thus are not exempt from the bankruptcy estate, the U.S. Bankruptcy Appellate Panel for the Eighth Circuit has ruled.
A debtor filed a voluntary Chapter 7 bankruptcy petition in January 2018. He listed as exempt retirement funds his share of his ex-wife’s 401(k) account and an entire IRA account. The value of these accounts was awarded to him as part of a property settlement in his 2014 divorce proceeding.
The law firm representing him in the divorce, listed as a creditor in the bankruptcy proceeding, objected to the claim of exemption. The bankruptcy court disallowed the exemption on the basis that the accounts were not retirement funds.
Not retirement funds. The appellate panel affirmed the bankruptcy court and disallowed the exemption. To be exempt under Bankruptcy Code Sec. 522(d)(12), an amount must meet two requirements: (1) the amount must be “retirement funds” that (2) are in an account exempt from taxation under Code Sec. 401 or certain other tax code provisions.
In Clark v. Rameker, 134 S. Ct. 2242 (2014), the Supreme Court held that an inherited IRA did not qualify for exemption because the “retirement funds” exemption is limited to individuals who create and contribute funds into the retirement account.
Similarly, the bankruptcy appellate panel reasoned, funds received via a marital property settlement do not meet this definition. The court rejected the debtor’s assertion that he planned to use the proceeds of the accounts for financial support during retirement. Courts are not required to address such “subjective considerations” in determining the exemption issue, the court explained.
SOURCE: In re Lerbakken (B.A.P. 8th Cir.).
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