Supreme Court - Rousey v Jacoway, 03-1407

[Belgarath]

The court apparently just ruled on this that IRA's can't be seized by creditors in bankruptcy proceedings. Also apparently not unlimited protection, the law shields them only to the extent "reasonably necessary for the support of the debtor and any dependent."

Don't know if anyone has access to documentation on this - if so, do you know where I can look at it on line? I tried the Supreme Court website, but I could only find the oral arguments. Thanks!

[KJohnson]

http://a257.g.akamaitech.net/7/257/2422/04...pdf/03-1407.pdf

[Belgarath]

Thanks!

[Guest rocnrols2]

Exercise caution before interpreting the Supreme Court's decision in Rousey as the equivalent in bankruptcy that Patterson v. Shumate is to qualified plans! If you look closely at the opinion, the Rouseys invoked a federal bankruptcy exemption. Under bankruptcy law, a debtor may generally choose whether to apply federal exemptions listed in the bankruptcy code or to apply state law exemptions and federal non-bankruptcy exemptions. The exception to the general rule is that a state may adopt legislation limiting the debtor to the state law exemptions and federal exemptions under nonbankruptcy law. To date, 35 states have chosen to opt out of the federal bankruptcy exemptions. These states include Alabama, Alaska, Arizona, California, Colorado, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Mississippi, Missouri, Montana, Nebraska, Nevada, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, South Carolina, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming. Although the state law exemptions are generally broader than the federal bankruptcy exemptions, they may not necessarily apply to IRAs.

The bottom line is that Rousey only applies if: (1) you do not live in an opt-out state when you file for bankruptcy; and (2) if you do live in an opt-out state, you do not elect the state law exemptions.

Stay tuned. Congress is expected to pass new bankruptcy legislation soon which, while making it tougher on debtors to shed liabilities, will also provide greater protection of retriement plan assets and education funding.

[mbozek]

Most states have enacted laws protecting IRAs and qualified plan assets of self employed persons from the claims of creditors. Very few (NH) have no state law protection for retirement plan accounts.

[mwyatt]

To our lawyer friends out there:

What exactly does this decision mean for our doctor clients? Given this decision, would you give a blanket go ahead to rollover prior plan proceeds to an IRA, or should they continue to keep funds in the qualified plan arena until retirement? I notice that this decision, based on limited reading, deals with a couple of modest means in a Ch 7 filing. Any difference with a 7 figure rollover, and a different circumstance of a malpractice suit?

[mbozek]

The best protection for any professional who owns a business is to have all retirement plan assets in a qualified plan subject to ERISA, e.g., one or more common law employees, because no assets can be seized by any creditor.

The next option is to live a state which protects retirement plan assets and IRAs from all creditors claims (NJ). In some states (NY) assets held in an annuity contract are exempt from creditors claims against the owner. There are ct decisions which have protected retirement plan assets of owners in non ERISA plans where the trust contains a spendthrift provision which under state law protects the assets from creditors claims. However the owner cannot be the sole trustee of the trust.

The final option is to rely on the Fed Bankruptcy exemption under Sect. 522 reviewed in the Rousey decision which protects only those retirement assets necessary for the reasonable support of the debtor. The proposed Fed bkcy revisions would increase protection of retirement plan assets.

The above is only general advice and employers need to consult with counsel to review the applicable state law if the plan is not subject to ERISA.

[mwyatt]

Thanks for the reply MBozek. My unlawyer reading of the original reporting was that there was language as you state "for the reasonable support", so there wasn't necessarily the blanket statement conveyed in headlines that IRAs were fully protected now. In the case in review, we were talking $55k for two unemployed people. Perhaps a surgeon with a $3m qualified plan balance shouldn't be so quick to rollover to an IRA, especially in light of the more pressing concern of malpractice suits rather than him personally filing for bankruptcy?

[mbozek]

There is no simple answer. If he declares bkcy he can exclude non ERISA retirement assets under the fed bkcy law (522) or use the exemptions permitted under state law if state law permits opting out of the fed exemptions. 522 permits exemption for pension assets and IRAs reasonably necessary for his support. While State law may protect all retirement plan assets from creditors, his interest in other assets may not be protected. If his pension plan is subject to ERISA because he has CL employees then all of his benefits are exempt from creditors in bkcy regardles of whether he elects the fed or state exemptions.

If the DR is liable for malpractice but does not declare bkcy then most state laws protect retirement benefits and IRAs from creditors claims.