Pensions in a Divorce
Section 541(c) of the Bankruptcy Code provides:
Section 541(c)(2) means that a pension plan that contains a transfer restriction that is enforceable under applicable non-bankruptcy law is not property of the bankruptcy estate. The debtor may retain it free from the claims of creditors.
Note: Even if the pension plan does come into the bankruptcy estate, the debtor may be able to claim it as exempt. In most states, including California, state law controls the extent of the exemption to which the debtor is entitled. See Cal. Civ. Proc. Code 703.140(b)(10)(E), 704.110, 704.115.
Plans Subject to ERISA
To be subject to ERISA, a pension plan must contain a provision prohibiting any voluntary or involuntary transfers of the plan assets. This provision is enforceable under ERISA. In Patterson v. Shumate, 504 U.S. 753 (1992), the Supreme Court held that ERISA constituted "applicable non-bankruptcy law" within the meaning of 541(c)(2) of the Bankruptcy Code. Thus, if a plan is subject to ERISA, it is not property of the estate. The debtor may retain the plan free from creditors’ claims.
Whether a Keogh plan i.e., a retirement plan established for the benefit of a self-employed person is property of the debtor’s bankruptcy estate depends on whether it contains an anti-alienation provision that would be enforceable under state law. Under California law, a private retirement plan is protected from creditors’ claims as long as the debtor does not exercise excessive control over it. For example, in In re Moses, 1999 WL 27488 (9th Cir. 1999), the Ninth Circuit Court of Appeals held that a Keogh plan was excluded from a debtor-doctor’s bankruptcy estate where it was established by a medical partnership with 2,400 physician members, including the debtor. The debtor’s contributions to the plan were mandatory. Moreover, the debtor could not withdraw from the plan as long as he remained a partner. The panel concluded that, given these facts, state law would enforce the anti-alienation provision, and thus the plan was not property of the bankruptcy estate.
Sometimes a trust will be established for a debtor’s benefit, either by the debtor or by some third party, independent of the debtor’s occupation or employment. The provisions of the trust document may purport to prohibit any voluntary or involuntary transfer of the trust assets. Under California law, such provisions are only enforceable if a third party establishes the trust and there is an independent trustee. See In re Moses, 215 B.R. 27, 34 (B.A.P. 9th Cir. 1997) (discussing Cal. Prob. Code 15304(a)). If the debtor established the trust himself or is free to gain access to the funds, the trust assets are property of the estate.
Several courts of appeal have held that a debtor’s interest in an IRA is not property of the bankruptcy estate. See In re Yuhas, 104 F.3d 612 (3d Cir. 1997); In re Meehan, 102 F.3d 1209 (11th Cir. 1997). The Ninth Circuit does not appear to have addressed this issue. However, in In re Rawlinson, 298 B.R. 501, 503 (B.A.P. 9th Cir. 1997), in which the issue presented was whether an IRA could be exempted from the estate, a Ninth Circuit bankruptcy appellate panel assumed without deciding that an IRA would be property of the estate, noting the following Supreme Court dicta:
Patterson v. Shumate, 504 U.S. at 763 (emphasis added; citations and footnotes omitted).
However, the panel then held that the IRA could be claimed as exempt under Cal. Civ. Proc. Code 703.140(b)(1)(E) to the extent necessary for the support of the debtor and the debtor’s dependents.
403(b) Retirement Plans
In In re Maclntyre, 74 F.3d 186 (9th Cir. 1996), the debtors, both physicians employed by a nonprofit hospital, had substantial funds in a 403(b) retirement plan. As in Rawlinson, no one apparently contended that these funds were not property of the estate. However, the debtors successfully claimed them as fully exempt under Cal. Civ. Proc. Code 704.115(b). The court held that 704.115(e), which limits a debtor’s exemption in retirement plans to what is necessary for the debtor’s dependents’ support, applied only to self-employed retirement plans and IRAs.
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ALIMONY PROTECTION – The former spouse who is owed money in a property settlement should consider the advantage of having the majority of the funds classified as alimony. Since alimony is non-dischargeable, the strategy protects future cash payments as much as possible.
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