Jeffrey Klobucar, Bassford Remele, P.A.
Contributing Editor: Kesha Tanabe, Tanabe Law
BAP___Lerbakken_v__Sieloff_and_Associates.pdf
In In re: Lerbakken, 590 B.R. 895 (B.A.P. 8th Cir.2018), the B.A.P. affirmed the bankruptcy court’s order disallowing the debtor’s claimed exemptions in his ex-wife’s 401K and IRA accounts. The B.A.P. explained that such accounts were not “retirement funds,” as defined by the U.S. Supreme Court in Clark v. Rameker.
To clarify, the funds were not in Lerbakken’s own 401k or IRA accounts. Rather, he was awarded a 50% interest in his ex-wife’s retirement accounts during his pre-petition divorce proceeding. The debtor could have submitted a QDRO and rolled over any distribution(s) from his ex-wife’s accounts into his own retirement accounts, but he failed to do so. As a result, he had a judicial order awarding half the value of the accounts to him, but he had not taken any action that caused the funds to be deposited into an account owned by him.
Under Section 522(d)(12), a debtor may claim an exemption for retirement funds “to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.” Following the reasoning in Clark, the B.A.P. clarified that the exemption is limited to a debtor who creates an account of the type listed in Section 522, and contributes funds to it for the day of his or her own retirement.
Because the exemption is limited to funds set aside for one’s own retirement, the debtor in Clark was not permitted to exempt an inherited IRA, and in this case, the debtor was not permitted to exempt funds in his ex-wife’s 401K and IRA accounts. The B.A.P. further stated that the debtor’s subjective intention to use the funds in the future upon his own retirement is not sufficient. If he wanted to qualify for an exemption under the Code, the funds must have been deposited into his own retirement account before the petition date.