Attorneys practicing in the family law area and those individuals going through the process of divorce need to be cognizant of the ramifications of a property settlement and the respective financial situations of everyone involved when allocating exempt assets such as IRAs, Pension Plans, or Profit Sharing — as discussed by Bankruptcy Judge Kevin R. Anderson of Salt Lake City in In re Kiley, 15-27838 (Bankr. D. Utah Dec. 4, 2018).
A Wife Files Divorce
Two years before bankruptcy, a Wife filed for divorce. Just prior to filing bankruptcy, Wife and Husband entered into a settlement agreement whereby Wife was awarded the entire IRA with $115,000 designated for child support and alimony arrears. The remaining $110,000 was designated as a property division.
One month after Wife filed bankruptcy, the divorce was finalized and a qualified domestic relations order (“QDRO”) was entered. The QDRO set forth the terms of the settlement. Wife then claimed the entire $225,000 exempt. The trustee objected to the claimed $110,000 exemption regarding the division of marital property. Wife lost.
Initially, Judge Anderson noted that as of the petition date,
Wife was a survivor beneficiary of Husband’s retirement account, and
it qualified as an ERISA-qualified pension trust, and
the $110,000 portion of the IRA was not property of the estate under Section 541(c) of the Bankruptcy Code.
Though helpful to Wife, there was more.
Timing of the Bankruptcy and QDRO
The problem was the timing. The QDRO was entered one month after the bankruptcy was filed. This is important as Judge Anderson said there was nothing in the QDRO indicating that the funds were to be converted into a rollover IRA in Wife’s name as of the petition date. Likewise, he said there was no evidence that Wife intended to roll the funds into an IRA, which might be exempt in her bankruptcy.
Keeping in mind that the conveyance of the IRA was for support and back alimony with the remainder being a property division, Judge Anderson found that there was nothing to show that Wife was an “alternate payee” of the husband’s retirement account as of the date of bankruptcy. The QDRO was entered after the bankruptcy and it was the QDRO that made the Wife the “alternate payee” whose interest would be exempt under a Utah exemption statute.1 Yet, exemptions are determined and claimed as of the petition date. Wife’s interest in the IRA did not occur until after the bankruptcy.
Judge Anderson then noted that absent a rollover that might be claimed as exempt, because Wife received the IRA within 180 days of the petition date per the Divorce Decree, it became property of the estate pursuant to Bankruptcy Section 541(a)(5)(B) and Wife could not claim it as exempt from claims of creditors. Wife was therefore ordered to turn the $110,000.00 over to the trustee for distribution to creditors.
As for the $115,000.00, which was considered to be child support arrears, the Court found such funds to be exempt. However as to the remaining portion of the $115,000 considered to be alimony, the Judge found additional discovery was needed for the Trustee to determine what was reasonably necessary for the support of Wife and her children.
Another consideration for lawyers and clients to consider is: because the Court found Husband’s retirement funds did not roll over into an IRA, presumably, the distribution constituted an early withdrawal and therefore was subject to either Husband or Wife paying taxes and penalties which would not have otherwise existed had the Divorce Decree been entered prior to the filing of the Bankruptcy.
1. There is nothing to indicate that the same would not apply under Texas law.