Generally assets held in a retirement account such as a 401(k) or IRA are exempt from the claims of creditors.  The tests are:

  1. the amount in the account must be retirement funds
  2. the account the funds are held in must be one that’s exempt from taxation under certain sections of the Internal Revenue Code

A recent court case (Lerbakken v. Sieloff and Associates) chipped away at these protections.  The facts:

  • In 2014 the debtor was awarded half of his ex-spouse’s 401(k) and IRA accounts.
  • In 2018 the debtor filed a voluntary Chapter 7 bankruptcy petition.

The debtor claimed the accounts were exempt under the following arguments:

  • Since the assets aren’t taxable to his ex-spouse they are not taxable to him.  In essence the status of the transferor and transferee are the same.
  • The accounts represented marital property that the debtor’s ex-spouse saved for their retirement.  He intended to use the accounts to support his retirement.

The Appellate Panel said, “Nice try, deadbeat!”  Well, maybe not those exact words but the debtor’s argument was nonetheless found unpersuasive.  The Panel’s rationale:

The exemption is limited to individuals who create and fund the retirement accounts.  Retirement accounts received by any other means (such as a property settlement) don’t meet the statutory definition for exemption.