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Archive for the ‘retirement funds’ tag

“Property of the Estate” and “Death Benefits”

June 5th, 2017 at 7:00 am

The 180-day rule applicable to life insurance proceeds also applies to death benefits overall. Death benefits may also often be exempt.

Our last two blog posts have been about inheritances and life insurance proceeds. Death benefits work the same in a Chapter 7 “straight bankruptcy” case. That is:

  • depending on the timing of the death benefit, it may be property of your Chapter 7 estate; and
  • if it IS property of the estate, it may be exempt.

Just like inheritances and life insurance proceeds:

  • if the death benefit is NOT property of the Chapter 7 estate, it’s yours to do with whatever you want;
  • if the death benefit IS property of the estate and is NOT exempt, your Chapter 7 trustee can take it from you and use those funds to pay your creditors; and
  • if the death benefit IS property of the estate but IS also exempt, it’s protected from the trustee, and is yours to do with whatever you want.

So you can keep a death benefit either if it is not property of the estate or if it is exempt.

But First, What’s a Death Benefit?

A death benefit (which is not defined in the U.S. Bankruptcy Code) is also known as a survivor benefit. Like it sounds, it is money you receive as a result of another’s death. Death benefits can come from a decedent’s pension or retirement fund, IRA, Social Security, annuity, veteran’s benefit, and various other investment funds and retirement plans.

Death benefits may be paid in a lump sum or in monthly or annual payments. The funds may the entire amount the decedent was receiving or a set percentage of it. You may have a right only to a portion of the property, shared with other beneficiaries. Some death benefits can go only to certain specific relatives while others go to whomever the decedent designated.

The 180-Day Rule

The 180-day rule determines whether a death benefit is or is not property of your Chapter 7 estate. If within 180 days after you file bankruptcy you “acquire or become entitled to acquire” an “interest in property” “as a beneficiary… of a death benefit plan,” that property is “property of your bankruptcy estate.” It’s counted as if it was your property at the time you filed your case, even though it didn’t become yours until during that 180-day period.  (See Section 541(a)(5)(C) of the Bankruptcy Code.)

So, if you file a Chapter 7 case and the person from whom you receive the death benefit dies within 180 days thereafter, the death benefit is property of the bankruptcy estate. It potentially can be taken by the trustee and used to pay your creditors. If the death occurs more than 180 days after filing, the death benefit is not property of the estate. It’s all yours.

Death Benefit Exemptions

Just as some life insurance proceeds are exempt, many forms of death benefits are as well. It depends on the type of death benefit, and on the exemptions applicable to your state.

For example, if you qualify to use the federal exemptions you can exempt death benefits from most types of retirement plans. (Section 522(d)(12) of the Bankruptcy Code.) And similar to life insurance proceeds, you can generally exempt your “right to receive” payments “under a stock bonus, pension, profitsharing, annuity, or similar plan or contract on account of… death… to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.” (Section 522(d)(10)(E) of the Bankruptcy Code.)

Many state exemption laws have similar provisions.

CAUTION: Just because an asset would have been exempt in the hands of the decedent, it is not necessarily exempt as a death benefit for the beneficiary. This entire area is complex. Courts have disagreed on aspects such as this because the law is not always clear. This is definitely an area where you want to have an experienced bankruptcy in your corner.


The Maximum IRA Exemption

March 2nd, 2016 at 8:00 am

Most pensions and other retirement funds are “exempt”—completely protected when you file bankruptcy. But there’s an exemption cap for IRAs.


Property Exemptions

When you file a Chapter 7 “straight bankruptcy” case usually you are able to keep everything you own because of property “exemptions.” These are usually categories and amounts of assets that people are allowed to keep, and their creditors and the bankruptcy trustee are not allowed to take. For example, there are homestead exemptions for your home, vehicle exemptions for your vehicle(s), and usually many other categories.

The intent behind exemptions is that you can’t really get a fresh financial start if you have to give everything to your creditors. So the exemptions protect a basic set of assets. Depending on where you live and what assets you own, you have a right to exemptions through your state’s laws and possibly also through federal laws.

As long as the exemption categories and amounts cover everything you own, you can keep everything in a Chapter 7 bankruptcy. To the extent you own something that isn’t covered, you may have to surrender it to your creditors.

Or you can often protect it through a Chapter 13 “adjustment of debts.” You protect what a Chapter 7 trustee would have been able to take from you by paying for the right to keep it through a payment plan, while all your creditors are prevented from taking any collection action against you or your assets.

Most Forms of Retirement Are Protected in Bankruptcy

Exemptions cover not just tangible assets but also certain rights and intangible assets you may have, such as your retirement funds.

Retirement funds held in virtually all forms are exempt—fully protected—when you file any kind of bankruptcy case. Almost all tax-exempt forms of retirement are covered, no matter how much in value.

Conventional pensions—both defined benefit and defined contribution plans—are exempt. Profit sharing and stock bonus plans are exempt. 401(k) plans and Employee Stock Ownership Plans (ESOPs) are exempt. Social security is usually exempt.

This is true no matter where you live. In a majority of the states residents are required to use that state’s set of exemptions instead of a federal set. But ever since a major amendment of the Bankruptcy Code in 2005, all tax-exempt (“ERISA-qualified”) retirement plans are protected when you file bankruptcy anywhere in the United States.

All of these retirement plans are exempt no matter how much their value. That is, almost all of them.

The (Relatively High) IRA Exemption Cap

However, there is a cap on the amount of funds that you can exempt in a traditional Individual Retirement Account (IRA).  (See Section 522(n) of the Bankruptcy Code.) That cap is so high that it won’t affect most people reading this, but it’s something to be aware of.

The maximum amount of money that can be exempt in a traditional IRA was set at $1 million in the 2005 bankruptcy law amendment mentioned above, with future cost-of-living adjustments (Section 104).

The Cap Is Increasing April 1

This IRA exemption maximum has gone up every 3 years, up to $1,245,475 in 2013, and now on April 1, 2016 is increasing again to $1,283,025.

This cap does NOT apply to either “SEP IRAs” (Simplified Employee Pensions) or “simple IRAs” (Savings Incentive Match PLans for Employees).

Retirement Funds vs. Paid Retirement Benefits

Careful: while funds in your retirement accounts are exempt from creditors (except as just discussed), retirement benefits that are being currently paid to you as income are not necessarily exempt.

Under Chapter 7 bankruptcy, the bankruptcy trustee cannot take any retirement benefits that are necessary for your support, but under certain circumstances might be able to use amounts in excess of that to repay your creditors. Under Chapter 13 bankruptcy, all retirement income is calculated into your repayment plan and will help determine how much of your debts you must repay while you are in the plan.


Bankruptcy Concerns: Supreme Court Decides on IRA Exemptions

July 26th, 2014 at 10:17 am

IRA, IRA exemptions, San Antonio bankruptcy attorney, Supreme Court ruling, inherited IRA account, financial stability, retirement fundsMillions of people across the country have been living under the auspices that securing funds in 401(k)’s, IRA’s, and other long term accounts will ensure the financial stability of both themselves and their loved ones. These accounts are structured to prevent the need for a bankruptcy attorney, especially in the case of an inheritance. However, due to a recent Supreme Court ruling regarding inherited IRA accounts, this may no longer be the case.

Traditionally, companies can offer incentives to employees for the purposes of retention as well as stability including benefits such as pension plans, 401(k)’s, and Individual Retirement Accounts (IRA). Often, these accounts are used for retirement purposes, with many employers matching personal contributions into the account to a certain percentage. These accounts generally have beneficiaries in the event of the death of the policyholder.

In the past, these accounts could be transferred into an inherited IRA account, making them completely exempt by federal law in bankruptcy cases. This is no longer the case, however. In a Supreme Court decision handed down this year, any money that is inherited is no longer considered a retirement fund, therefore making it accessible to creditors in case of debt.

It has recently come to light that medical bills are in fact one of the leading causes of bankruptcy in America. As people get older, they become much more susceptible to injuries, illnesses, and subsequently very high medical bills. If your spouse was the primary moneymaker in your marriage and he or she passes away leaving you with these bills, the implications of the decision can be far reaching.

If inherited IRA accounts are no longer considered retirement funds in bankruptcy court, and medical bills pile up from a deceased spouse, you may not have the financial security you once thought you did. If you are facing overwhelming debt from a deceased spouse and are considering bankruptcy as a viable option, consult with a Texas attorney to explore all options possible.

Account exemptions during bankruptcy can seriously affect long term financial stability. The Law Offices of Chance M. McGhee, located in San Antonio, Texas and serving clients across the surrounding counties, can provide you with the legal advice you need to get through hard financial times. Please contact an experienced San Antonio bankruptcy attorney today to discuss your situation.

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