A federal appeals court upheld an earlier ruling that 401(k) plan and individual retirement account (IRA) assets acquired by an ex-spouse in a divorce proceeding aren’t retirement funds protected by federal law from bankruptcy creditors. The case is Brian A. Lerbakken, Debtor-Appellant v. Sieloff and Associates, No. 18-6018 (Bankr. 8th Cir., Oct. 16, 2018).
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Qualified retirement accounts usually are sheltered from most bankruptcy creditors. IRA assets are shielded up to $1.283 million at present.
Background of the Case
In the Lerbakken case, a bankruptcy court first decided the debtor, Brian Lerbakken, could not exclude from his bankruptcy estate the retirement assets that he had been awarded from his ex-wife in a 2014 divorce settlement. These included one-half of the value in his ex-spouse’s 401(k) and her entire IRA account. The divorce decree had instructed counsel to submit a qualified domestic relations order (QDRO) related to the assets but that wasn’t done, and Lerbakken didn’t take any other action to obtain possession of the accounts.
Lerbakken appealed in September 2018, and the U.S. Bankruptcy Appellate Panel for the 8th Circuit affirmed the decision that these assets must be included in his bankruptcy assets and be available to creditors.
The judges cited Clark v. Rameker, which was decided by the U.S. Supreme Court in June 2014, as precedent for their ruling. In that case, tax-qualified retirement assets left as an inheritance for a non-spousal beneficiary were found not to be protected from bankruptcy creditors. Although the appellate judges acknowledged that Lerbakken didn’t receive his ex-wife’s retirement assets in the same way as the Clark inheritance, they found that distinction to be immaterial.
Funds’ Intended Use Irrelevant
Lerbakken had asserted, in trying to meet the standard set by the Clark precedent, that the retirement assets he was awarded as marital property had been “saved for their joint retirement,” the decision stated. He further said that he intended to use the money from the accounts to support his own retirement.
However, the appellate panel found it unnecessary “to address these subjective conditions in determining the exemption issue.” Instead, Clark directed courts to “look to the legal characteristics of the account in which the funds are held, asking whether, as an objective matter, the account is one set aside for the day when an individual stops working.”
Applying this standard, the court found that Lerbakken’s interest in the 401(k) and IRA “resulted from nothing more than a property settlement,” and that the accounts, therefore, were “not retirement funds which qualify as exempt under federal law.”
| Jane Meacham is the editor of BLR’s retirement plan compliance publications. She has nearly 30 years’ experience as a writer/editor of financial services news. |