By James W. Mallonee
The Florida Legislature created Florida’s statute Chapter 222 which lists a variety of exemptions from creditor claims. One of those exemptions is to protect individuals IRA’s under a plan that qualified for 401(a), s. 403(a), s. 403(b), s. 408, s. 408A, s. 409, s. 414, s. 457(b), or s. 501(a) status under Federal code. Generally speaking, almost every IRA falls into one of these classifications.
Chapter 222, of the Florida Statutes contains language that exempts claims from creditors against a person’s IRA. The statue states in pertinent part that any money or other assets payable to an owner or a beneficiary from a fund or account is exempt from all claims of creditors of the owner or beneficiary of such IRA. The funds or accounts that the legislature listed are those recognized under 401(a), s. 403(a), s. 403(b), s. 408, s. 408A, s. 409, s. 414, s. 457(b), or s. 501(a) of the Federal code. However, Florida case law held that “inherited IRA’s” are subject to claims of creditors. The Court stated that the exemption from creditors pertained only to the original IRA owned by the person who funded it or those IRA’s that are not inherited (e.g. rolled over to a surviving spouse).
The Court identified an “inherited IRA” as liquid assets that a beneficiary may access at any time without penalty and that the beneficiary must take as income without regard to retirement needs. In essence, the Court reasoned that IRA’s are for the preservation and benefit of its owner and spouse’s assets at retirement.
The case that has raised the loss of the creditor claim exemption involving an inherited IRA is known as the “Robertson” case. The Robertson ruling could have had far reaching implications to those persons who prepare their estate such that the funds being passed to their beneficiaries will be exempt from the children’s creditor’s claims. The Court did infer in the Robertson ruling that if the IRA was eligible to be rolled over, that its creditor exemption would continue. Generally speaking IRA’s can only be rolled over to surviving spouses or when a person moves his pension out of a company to a personal IRA account. However, the surviving children of an IRA owner generally do not have the luxury of rolling an IRA account over which exposes it to creditors under the Robertson ruling.
The circumstances that created the Court’s ruling in the Robertson case arose following the death of the beneficiary’s father. The bank, where the IRA was held, gave the beneficiary two options: 1) transfer the IRA account into an inherited IRA which required the beneficiary to accept minimum distributions as well as discretionary distributions without penalty; or, 2) accept distributions pursuant to the five year death rule which would require the beneficiary to exhaust the IRA funds by taking discretionary payouts over 5 years. Mr. Robertson elected to take the inherited IRA option. The Court interpreted this election as the placement funds from the decedent’s IRA into a separate account for the beneficiary.
The Court commented in explaining its position that when the owner of an IRA passes, his or her IRA becomes the property of the non-roll over beneficiary and no longer qualifies for the same exemption from taxation. The Court concluded that it no longer is an IRA in terms of taxation or penalty for early withdrawal. Unfortunately, the Court did not analyze whether selecting the 5 year death rule would have also made the decedent’s IRA eligible for garnishment by a suing creditor. The analysis fell squarely on the selection made by Mr. Robertson.
A solution to this problem that many people employed was to have a testamentary or simple trust prepared that would take effect following the death of an IRA owner. The thought was that a testamentary or simple trust would avoid the need for protection under Chapter 222, Florida Statutes. Utilizing this technique, the funds from the IRA would pass to a separate trust (via a conduit or accumulator trust) that contains a spendthrift clause protecting the accumulated funds due a beneficiary from his or her creditors. However, this strategy is not fool proof and the owner of an IRA must be careful about how the beneficiary of their IRA is named. If it names a trust with nothing more, the entire IRA may be subject to immediate taxation.
Fortunately, the legislature changed the wording of the IRA section of Chapter 222, Florida Statutes. The revised language clearly states that any money or other assets payable to an owner, a participant, or a beneficiary from, or any interest of any owner, participant, or beneficiary in, a fund or account is exempt from all claims of creditors of the owner, beneficiary, or participant if the fund or account is in substantial compliance with the applicable requirements for tax exemption under s. 401(a), s. 403(a), s. 403(b), s. 408, s. 408A, s. 409, s. 414, s. 457(b), or s. 501(a) of the Internal Revenue Code of 1986, as amended. Thanks to Florida’s legislature and their updating the IRA section, you can breathe a lot easier
You would be well served to have your IRA verified as to who the named beneficiaries are to ensure it is not exposed to creditors and immediate taxation following your death. Pay a visit to an attorney and ask the question of whether your IRA is exposed to creditor and immediate taxation following your death. Your attorney can discuss with you a plan to ensure that your hard earned deferred tax savings will not be exposed to creditors or immediate taxation. Your children or spouse will thank you for it.
James W. Mallonee (Jim Mallonee) is a graduate with a B.A. degree from the University of South Florida and a Master of Science degree from Rollins College in Winter Park, Florida. He obtained his Juris Doctorate from the University of the Pacific, McGeorge School of Law in Sacramento, California. Prior to returning to Florida to practice law, Mr. Mallonee was employed by Intel Corporation for 22 years in such locations as New Jersey, Florida and California.
In addition to being a member of the Florida Bar since 2003, Mr. Mallonee serves on the Charlotte Community Foundation Committee for asset allocation and teaches Business Law at State College of Florida. Mr. Mallonee is also on the Board of Directors for the Military Heritage Museum located in Charlotte County, Florida.
His firm practices law in the following areas: Probate, Wills & Trusts, Guardianships, and Litigation in the areas of Real Estate, Guardianships and Estates. The firm has two locations in Venice and Port Charlotte, Florida.
James W. Mallonee, P.A.
946 Tamiami Trail, #206
Port Charlotte, FL 33953
(941) 206-2223
Facsimile (941) 206-2224
871 Venetia Bay Blvd., #225
Venice, FL 34285
(941) 207-2223