Kentucky and Florida estate planning lawyer/blogger C. Carter Ruml recently wrote an interesting summary of Robertson v. Deeb, 16 So.3d 936 (Fl. Dist. Ct. App. 2 Dist. 2009), a pro-creditor decision that pokes a hole in Florida’s well-earned reputation as an asset-protection haven. The blog post is entitled Creditor Protection Denied for Florida Debtor’s Inherited IRA, and it’s well worth reading in its entirety. Here’s an excerpt:
KYEstates has been following issues of creditor protection for inherited IRAs closely (see here and here), and we haven’t hidden the fact that on this issue, we’re biased in favor of the debtor. Before today, our series was tied at Debtor 1, Creditor 1. With today’s report, the score regrettably changes to Debtor 1, Creditor 2. The bad news comes in the form of Robertson v. Deeb, 16 So.3d 936 (Fl. Dist. Ct. App. 2 Dist. 2009), a pro-creditor decision that illustrates the risks facing beneficiaries of inherited IRAs seeking creditor protection for their accounts.
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In Robertson, the account holder (Robertson) was sued by Deeb (payee under a promissory note made by Robertson). The creditor obtained a judgment and served a write of garnishment on RBC Wealth Management, custodian of the debtor’s inherited IRA. The debtor filed a claim of exemption and argued that the IRA, which the debtor had inherited from his father, was exempt from garnishment under F.S. 222.21(2)(a). [For more on Florida asset protection, consult this KYEstates chart.]
Even though F.S. 222.21(2)(a) protects “money or other assets payable to an owner, a participant or a beneficiary” in a fund or account that is maintained as an IRA pursuant to a plan or governing instrument that is exempt from taxation under certain provisions of the Internal Revenue Code, the trial court found that this statutory protection does not extend to an inherited IRA, and denied the debtor’s claim of exemption.
The Second District Court of Appeals upheld the trial court, concluding that F.S. 222.21(2)(a) “does not apply to inherited IRAs because the plain language of that section references only the original ‘fund or account’ and the tax consequences of inherited IRAs render them completely separate funds or accounts.”
And while we’re talking about asset-protection and inherited IRAs, Florida practitioners should take note of an excellent discussion addressing this precise issue in the May/June 2010 editition of the ABA’s Probate and Property magazine. In a column entitled Retirement Benefits Planning Update, Detroit, MI estate planning attorney Harvey B. Wallace II discussed the Robertson v. Deeb case and possible "work around" planning options. Here’s an excerpt:
The degree to which the creditors of a beneficiary of an inherited IRA have access to the IRA account in a nonbankruptcy context depends on the interpretation of state statutes, which, in many cases, seem on their face protective of inherited IRAs but, when interpreted by the courts, are not. The protective provisions of the BAPA that appear to exempt an inherited IRA from a beneficiary’s bankruptcy estate have yet to be subjected to extensive judicial scrutiny. If an account owner has concerns that the beneficiary or one of the beneficiaries who may inherit all or a portion of an IRA may have creditor problems, the use of a trusteed IRA that restricts post-death distributions and contains a spendthrift clause may, depending on the applicable state law and its interpretation, afford creditor protection. The naming of a properly drafted conduit trust or discretionary trust as the beneficiary of an inherited IRA invokes full protection of the state’s spendthrift law and provides the maximum possible protections from the creditors of a beneficiary of the trust.