Law Offices of James W. Mallonee, P.A.
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Helping individuals & families across Florida with their legal matters since 2005

Is Your IRA Protected?

The Florida Legislature created Florida’s statute Chapter 222 which lists a variety of exemptions from creditor claims. One of those exemptions was to protect individuals IRA’s under a plan that qualified for 401(a), s. 403(a), s. 403(b), s. 408, s. 408A, s. 409, s. 414, s. 457(b), or s. 501(a) status under Federal code. Generally speaking, almost every IRA falls into one of these classifications. This article covers a recent event that may place your IRA into the crosshairs of a creditor’s claim making it susceptible to being garnished following the death of the owner.

Chapter 222, of the Florida Statutes contains language that exempts claims from creditors against a person’s IRA. The statue states in pertinent part that any money or other assets payable to an owner or a beneficiary from a fund or account is exempt from all claims of creditors of the owner or beneficiary of such IRA. The funds or accounts that the legislature listed are those recognized under 401(a), s. 403(a), s. 403(b), s. 408, s. 408A, s. 409, s. 414, s. 457(b), or s. 501(a) of the Federal code. However, a recent case ruled that “inherited IRA’s” are subject to claims of creditors. The Court stated that the exemption from creditors pertained only to the original IRA owned by the person who funded it or those IRA’s that are not inherited (e.g. rolled over).

The Court identified an “inherited IRA” as liquid assets that a beneficiary may access at any time without penalty and that the beneficiary must take as income without regard to retirement needs. In essence, the Court reasoned that IRA’s are for the benefit of the owner and his or her need for the preservation of assets at retirement.

The case that has raised the loss of the creditor claim exemption involving an inherited IRA is known as the “Robertson” case. The Robertson ruling may have far reaching implications to those persons who prepare their estate such that the funds being passed to their beneficiaries will be exempt from the children’s creditor’s claims. The Court did infer in the Robertson ruling that if the IRA was eligible to be rolled over, that its creditor exemption would continue. Generally speaking IRA’s can only be rolled over to surviving spouses or when a person moves his pension out of a company to a personal IRA account. However, the surviving children of an IRA owner generally do not have the luxury of rolling an IRA account over making the IRA potentially exposed to creditors under the Robertson ruling.

The circumstances that created the Court’s ruling in the Robertson case arose following the death of the beneficiary’s father. The bank, where the IRA was held, gave the beneficiary two options: 1) transfer the IRA account into an inherited IRA which required the beneficiary to accept minimum distributions as well as discretionary distributions without penalty; or, 2) accept distributions pursuant to the five year death rule which would require the beneficiary to exhaust the IRA funds by taking discretionary payouts over 5 years. Mr. Robertson elected to take the inherited IRA option. The Court interpreted this election as the placement funds from the decedent’s IRA into a separate account for the beneficiary.

The Court commented in explaining its position that when the owner of an IRA passes, his or her IRA becomes the property of the non-roll over beneficiary and no longer qualifies for the same exemption from taxation. The Court concluded that it no longer is an IRA in terms of taxation or penalty for early withdrawal. Unfortunately, the Court did not analyze whether selecting the 5 year death rule would have also made the decedent’s IRA eligible for garnishment by the suing creditor. The analysis fell squarely on the selection made by Mr. Robertson.

A reading of Chapter 222, Florida Statutes, indicates that the Court’s ruling is inconsistent with the language of the statute because it says nothing about the exemption being limited to those IRA’s that only roll over. In fact, there is no language regarding the loss of the exemption from creditors if an IRA’s funds pass to a beneficiary following the death of the owner. In essence, the Court created a ruling based on what they thought the legislature meant.

Based on the Court’s ruling and analysis, it is the author’s opinion that at the moment a decedent dies, his or her IRA is exposed to a beneficiaries creditor claim unless the beneficiary can roll it over (e.g. surviving spouse). So what can a person do to continue to protect their IRA assets from a beneficiary’s creditor if there is no surviving spouse?

The solution seems to be a testamentary or simple trust that would take effect following the death of an IRA owner. A testamentary or simple trust would avoid the need for protection under Chapter 222, Florida Statutes. In this situation the funds from the IRA would pass to a separate trust that contains a spendthrift clause protecting the accumulated funds due a beneficiary from his or her creditors. You may be wondering what the difference is between the circumstances in the Robertson case and the author’s suggestion of a standalone trust to avoid creditor garnishment. The difference is that no beneficiary is named in the IRA as opposed to the Robertson case where a beneficiary was named. By not naming a beneficiary in the IRA, the decedent’s estate will take possession of the IRA at death. The decedent’s Last Will and Testament will either create a trust and/or pass the funds to a Trustee. The Trustee will then be charged with managing the funds for the benefit of the decedent’s beneficiary. In creating this procedure, the funds are not directly provided to the beneficiary, but to a third party who is not obligated to the creditor. The downside for the beneficiary in this case is that as the funds are transferred to him or her by the Trustee, they become eligible for collection by creditors. The additional downside for the estate is the requirement that income taxes be paid on the IRA funds collected by the Trustee.

If you have an IRA and are concerned that the funds from such IRA may be exposed to creditors following your death and you want to protect it for the benefit of someone, then in that event, you should seek guidance from an attorney. Your attorney can discuss with you a plan to ensure that your hard earned deferred taxed savings will not be exposed to creditors at your death. Your children may not immediately understand your reasons for implementing a diversionary plan, but in the end they will thank you for it.

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