Loan Transaction Costs IRA its Bankruptcy Exemption

A recent case illustrates a common problem with IRAs when their participants declare bankruptcy.

Generally, IRAs are exempt assets in bankruptcy proceedings, and are thus beyond the reach of the bankrupt individual’s creditors. This exemption in the Bankruptcy Code is tied to the tax-exempt status of the IRA. 11 USC §522(d)(12) provides an exemption to “[r]etirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section ... 408 ... of the Internal Revenue Code of 1986.”

Code §497(c)(1) prohibits loan transactions between an IRA and a disqualified person. If an IRA engages in a prohibited transaction with the beneficiary or creator of the account, the IRA will lose its exempt status pursuant to Code §408(e)(2).

While the IRS has an interest in policing the prohibited transaction rules, in my experience I have seen these issues come up more in bankruptcy proceedings than in tax audits and controversies. This is because the bankruptcy trustee is always on the lookout to void the exempt status of IRA accounts. If the trustee can convince the bankruptcy court that a prohibited transaction occurred in regard to the IRA like a loan transaction, they then argue that the IRA is no longer exempt under Code §408(e)(2) and thus there is no bankruptcy exemption. I have seen this in regard to straight loan transactions, and even in circumstances when the participant receives a distribution from an IRA and rolls it back into the same IRA within the tax-free 60 day rollover period – the trustee argues that this is in fact a loan, even though such a rollover transaction back to the same IRA is expressly authorized in the Code.

In the case at issue, the IRA was an investor in a partnership. As what typically happens in these cases, the parties fight it out in bankruptcy court as to whether a transaction was a “loan.” In the instant case, the partnership itself went through bankruptcy, in addition to the IRA participant. In the filings of the partnership, it submitted schedules showing the IRA as an unsecured creditor – the bankruptcy court relied on those schedules to find that the IRA had made a loan to the partnership and thus the IRA lost its exempt status.

Kellerman v. Rice,116 AFTR 2d 2015-6133 (DC AR)

Prenuptial and Postnuptial Agreements

I gave a presentation yesterday at the Florida Bar Tax Section CLE How to Be an Estate Planning Wizard. The subject was the tax and other aspects of prenuptial and postnuptial agreements. The presentation covered both federal and Florida issues.

For those with an interest in the subject, you can watch slides of my presentation here. I have added audio to the slides, so it is almost like being at the presentation. The presentation plays off the website of Prezi.com, so you do not need to download anything to your computer.

Any one who was at the seminar or was viewing it online and would like to see the part of my presentation that I did not get to because time ran out, can also see what they missed.

While I have posted presentation materials before, this is the first time I have gone and added audio – feel free to email me at crubin@floridatax.com with any comments or critiques so as to guage reader interest for the future.

Florida Supreme Court Holds for Extended Claims Period for Known or Ascertainable Creditor Claims [Florida]

In 2013 I wrote about the Golden case which ruled that a known or reasonably ascertainable creditor who did not receive a Notice to Creditors in a probate proceeding could file a claim against the estate up to 2 years after death. That the estate published notice generally would not invoke the 3 months claims period  - such a notice only applies to creditors who are not known or reasonably ascertainable. This case was contrary to two other appellate circuits, who had applied the 3 month limitations period. You can read my write-up here.

The Florida Supreme Court has now sided with the Golden court, such that the extended claims period of 2 years was determined to be the correct statutory interpretation.

Jones v. Golden, Florida Supreme Court, Case No. SC13-2536 (October 1, 2015)