Bankruptcy Law: Inherited IRAs aren't exempt as "retirement funds"

When individuals file for bankruptcy protection, they are permitted to exempt certain categories of assets from their bankruptcy estate, thereby removing those assets from the potential reach of the estate's creditors. One category of exempt assets includes certain "retirement funds." 11 U.S.C. Sec. 522(b)(3)(C). The question before the U.S. Supreme Court in Clark v. Rameker was whether or not funds contained in an inherited IRA qualify as "retirement funds" for purposes of the exemption. The Court held that they do not, as they are fundamentally different in character than traditional retirement funds.

The Court reviewed the different types of IRAs permitted under Federal law: traditional IRAs, Roth IRAs, and inherited IRAs. The first two types offer tax advantages to encourage individuals to save for retirement -- qualified contributions to traditional IRAs are tax deductible, while qualified distributions from Roth IRAs are tax free. To ensure that the money is actually set aside to be used for retirement, certain withdrawals from both types of accounts before age 59 1/2 are subject to a 10% penalty. Individuals who inherit an IRA after the owner's death have a choice of either rolling the IRA over into their own IRA (if their spouse was the owner), or holding it as an inherited account.

Inherited IRAs operate differently than traditional or Roth IRAs. For example, individuals may withdraw funds from them at any time, without paying a tax penalty. In fact, they must withdraw its funds, either completely within 5 years of the original owner's death, or through annual minimum distributions. Furthermore, the owner of an inherited IRA can never make any contributions to the account.

In this case, the decedent named her daughter as the sole beneficiary of her IRA, and when the owner passed away the following year it was worth about $450,000. The daughter elected to take monthly distributions from the inherited IRA. Nine years later she filed for Chapter 7 bankruptcy protection, and she sought to exclude the IRA (now worth about $300,000) from the estate. The bankruptcy trusteee and unsecured creditors objected to the claimed exemption on the grounds that the funds in the inherited IRA were not "retirement funds" under the law. The Bankruptcy Court agreed, but was reversed by the District Court, which held that the exemption covered any funds originally accumulated for retirement purposes. The Seventh Circuit reversed the District Court, pointing to the different rules governing inherited IRAs, and stating that "inherited IRAs represent an opportunity for current consumption, not a fund for retirement savings."

The Supreme Court agreed, holding that the term "retirement funds" is properly understood to mean sums of money set aside for the day an individual stops working. The Court concluded that because the holder may never invest any further money into the account, and because they are required to withdraw money from them regardless of how many years they are from retirement, and because they may withdraw some or all of the money at any time and for any purpose without penalty, such inherited IRAs are not truly "retirement funds" as defined in the law. Instead, they are pots of money that can be freely used for current consumption, not funds objectively set aside for one's retirement, even if that's how the new owner chooses to use them. The proposed exemption was therefore disallowed.    

Business Law: Reviving Judgments

"If handled correctly, a judgment, like an ordinary houseplant, can last a long time, up to 27 years after the date the judgment was entered.  But just as neglecting to periodically water a houseplant will eventually cause it to wither and die, neglecting to periodically revive a judgment will eventually cause it to become dormant and [be] extinguish[ed]." Burman v. Snyder (1st Dist., 2014).  Under Illinois law, judgments expire after seven years, unless they are revived by petition.  The petition must be filed in the 7th year after its entry, or in the 7th year after its last revival, or in the 20th year after its entry, or at any other time within 20 years after its entry if the judgment becomes dormant.

In this case, the plaintiff obtained a judgment in 1991 for about $91,000.  He revived the judgment by the filing of a petition in 1998.  He did not, however, obtain service on the defendant.  Instead, he waited more than 13 years to try again, more than 20 years after the date of the original judgment.  After he was eventually served, the defendant moved to dismiss the petition on the basis that service on him was untimely and the judgment had already expired.  The trial court agreed, as did the Appellate Court, stating that a judgment becomes dormant 7 years after its last revival.  Since the plaintiff failed to file a second petition in 2005 (7 years after the first revival in 1998), and failed to file anything further before the 20th anniversary of the judgment, the judgment expired automatically by operation of law.  Thus, the judgment was no longer enforceable.  

Medicaid Eligibility - Prepaid Burial Contracts

In Evans v. The Illinois Dept. of Human Services, the Court reviewed the standards for qualifying pre-paid burial contracts as exempt for purposes of the five-year look-back period for Medicaid eligibility.  The applicant purchased a $12,000 life insurance policy, and assigned it to an irrevocable trust to pay an estimated $12,000 in funeral and burial expenses.  She provided the Department with an estimate from a local funeral home for approximately that amount, but she never actually purchased a contract for such services.  The Department ruled that the life insurance purchase was a non-allowable transfer, and imposed a 3-month penalty period for the applicant's eligibility.

On review, the Court looked at the language of the Medicaid Act, the Illinois Public Aid Code, the Department's Policy Manual, and its Workers' Action Guide.  It concluded that because no actual services were contracted for, there was a transfer of $12,000 for less than fair market value.  Furthermore, the insurance policy provided that such expenses would only be paid if a bill for same was presented to the trustee within 45 days of the applicant's death, and if the bill was for less than the full amount of the policy, or if no bill was presented within the 45 days, the remaining value of the policy proceeds would then pass automatically to the applicant's children.  Since no services were ever contracted for, the Court determined that there was still a good chance that the insurance policy proceeds would not be used for funeral or burial expenses, and therefore, it was a disqualifying transfer.

The Court also reviewed how to calculate the rate to be used for the period of ineligibility, and decided that, based on the federal Medicaid Act, the rate to be used is that which is in effect at the facility on the date of application, not the date on which the Department makes it decision.  

Labor & Employment - Retaliatory Discharge for Protected Speech

In Drager v. Village of Bellwood, an electrician employed by the Village alleged that he was terminated because he complained that he was having to engage in political activities during work hours, and because he notified his union and OSHA when the Village failed to act on his recommendations regarding mold, asbestos, and code violations he discovered at the Village's Teen Center.  The Court looked at whether or not his speech was constitutionally protected by the First Amendment, stating that public employees do not surrender such rights by reason of their employment, so long as they are speaking as citizens about matters of public concern.

Thus, for the Court the initial inquiry was whether or not the employee was speaking as a citizen or as a public employee.  Then the Court must also determine whether the speech addresses matters of a public concern.  The Court must look at the content, form, and context of a given statement.  Speech that serves only a personal interest, instead of a public one, does not pass constitutional muster.  It must also be potentially of interest to the public.  The Court held that it was of some public interest that electrical work around the Village was not being done allegedly because an employee of the Department was being asked to do political campaign work instead, and it allowed the emloyee's claim to go forward on that Count.

The Court also looked at whether the employee stated a claim for retaliatory discharge under Illinois law, which requires that the discharge violates a clear mandate of public policy.  The Court again ruled in his favor, noting that he cited to a State statute which prohibits officials from using their position to coerce co-workers into performing political activities while at work or on duty. 

Estate Planning - Federal Estate Tax Exemption Amounts

Upon one's death, there are a number of tax consequences for the executor or administrator to consider.  The most notable is the estate tax, which is based upon the value of one's estate at death.  The value of your estate is based upon the fair market value of all of your assets (your "gross estate"), minus certain allowable deductions and (in special circumstances) reductions in the value of your assets.  Allowable deductions may include mortgages and other debts, estate administration expenses, and property passing to surviving spouses (the "marital deduction") and qualified charities.  Once your "net estate" has been calculated, the value of any lifetime taxable gifts is then added, and the tax is computed.  The tax is then reduced by the unified credit available to you at the time.

Most simple estates do not require the filing of an estate tax return.  However, a filing is required for estates with combined gross assets and prior taxable gifts exceeding $5,000,000 for decedents dying in 2011, $5,120,000 for decedents dying in 2012, and $5,250,000 for decedents dying in 2013.  (The exemption amount is to be "indexed up" in subsequent years, barring any further Congressional changes.)  Keep in mind that the gross estate will most likely include non-probate assets (such as assets that may pass by beneficiary designations) as well as probate assets, and may also include assets held by the decedent in a revocable living trust.

An estate tax return is to be filed within 9 months of the date of death, usually by the executor or his/her successor.  A six-month extension of the due date can be obtained if the estimated tax is paid with a request filed before the due date.  It takes the IRS usually between 4 and 6 months to process the return and provide the estate a closing letter.  This return is in addition to any income tax and gift tax returns that may also need to be filed on behalf of the estate.