Under Florida law, retirement benefits, including individual retirement accounts (“IRAs”) and inherited IRAs (“Retirement Benefits”) are generally exempt from creditors. However, what happens in a bankruptcy proceeding? As the Florida legislature opted out of the federal bankruptcy exemptions, Florida debtors use state exemptions Thus, in bankruptcy proceedings, because Florida exempts Retirement Benefits, such benefits are exempt from federal bankruptcy creditors.
Under a recent United States Supreme Court case, Clark v. Rameker (“Clark”), IF a state uses the federal bankruptcy exemptions, the Court determined that inherited IRAs are NOT exempt from creditors in a federal bankruptcy proceeding.
Relying on Clark , a federal bankruptcy court in a recent Minnesota case, In Re. Lebakken v. Sieloff and Associates, P.A., determined that, because the debtor used federal bankruptcy exemptions, Retirement Benefits awarded pursuant to a divorce settlement were NOT exempt from bankruptcy creditors. The rationale is that Retirement Benefits are generally exempt for the wage earners that actually earned the retirement benefits. Retirement Benefits received because of a divorce are not “retirement funds” of the spouse that received the Retirement Benefits only because of the divorce.
As Florida uses the state exemptions, Clark is not controlling in a Florida bankruptcy proceeding (because Clark addresses the use of federal exemptions). A well respected estate planning and asset protection attorney, Barry Nelson, raises the issue whether Retirement Benefits received by a spouse in a Florida divorce proceeding are protected from creditors in a bankruptcy proceeding?
Unfortunately, a QDRO is inapplicable to IRAs or inherited IRAs. Thus, the current statute is unclear as to whether IRA benefits received pursuant to a divorce settlement are exempt from creditors in a Florida bankruptcy proceeding.
The IRA Committee of the Real Property Probate and Trust Law (“RPPTL”) Section of the Florida Bar will be looking at this issue and hopefully, clarifying the statute to make clear that ANY IRA benefits received by an individual are exempt from all creditor claims.
ADVICE: Prior to filing bankruptcy in Florida, carefully review the statute and confirm that your exemptions are valid. If the debtor has received IRA Retirement Benefits in a divorce, then discuss with the bankruptcy attorney whether the position should be made on the bankruptcy filing whether these Retirement Benefits are exempt. Advise your clients who receive Retirement Benefits in a divorce that IRAs receives may not be exempt from creditor claims in a Florida bankruptcy. Keep an eye out for a possible revision or clarification.
WORD OF THE WEEK: Garnishment of wages is when a court issues an order requiring your employer to withhold a certain amount of your paycheck and send it directly to the person or institution to whom you owe money, until your debt is paid off. Under Florida law, certain wages are NOT subject to garnishment.
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