Magazine article The CPA Journal

Non-Rollover IRAs Join Property Exempt from Creditors' Claim

Magazine article The CPA Journal

Non-Rollover IRAs Join Property Exempt from Creditors' Claim

Article excerpt

Pursuant to an amendment to Sec. 5205 of the New York Civil Practice Law and Rules (CPLR), effective September 1, 1994, the corpus of non-rollover IRAs (which qualify under JRC Sec. 408) are generally exempt from being applied to satisfy money judgments. A brief history and explanation of the statute and the exceptions to the general rule follow.

CPLR Sec. 5205 lists personal property that is exempt from being seized or levied upon in order to satisfy a money judgment. In a bankruptcy proceeding in New York the property listed in CPLR Sec. 5205 may be excluded from the bankruptcy estate. Thus the assets listed in the statute are exempt from claims of creditors both in a bankruptcy proceeding and in a garnishment or other collection action outside of a bankruptcy case.

The statute begins by exempting from creditors' claims personal property such as the debtor's clothing, books, and certain household furniture and appliances. Although the statute exempts property held in trust for the judgment debtor where the trust has been created by or the fund originated from a person other than the judgment debtor, prior to 1987 no specific provision was made for any type of retirement plan. The 1987 amendments to the statute provide that Keogh plans and retirement plans established by a corporation (which qualify under IRC Sec. 401) are personal property exempt from being applied to satisfy a money judgment. The 1987 amendment also states that these retirement plans are exempt even though the judgment debtor is self employed, is a partner of the entity sponsoring the Keogh plan, or is a shareholder of the corporation sponsoring the retirement plan.

In 1989, CPLR Sec. 5205 was amended twice. The first 1983 amendment to the statute provides that the retirement plans described in the statute are conclusively presumed to be spendthrift trusts under the common law of the State of New York for all purposes including bankruptcy proceedings. The amendment also states that 100% of the income or other payments from retirement plans described in the statute are also exempt assets. The statute was amended a second time in 1989 to provide that rollovers created from retirement plans described in the statute are also protected as exempt assets.

The 1994 amendment to CPLR Sec. 5205 is significant because non-rollover IRAs are given protection from creditors for the first time. Since prior to this latest amendment the statute only exempted those IRAs created as a result of rollovers from Keogh plans or other plans established by a corporation, a number of court decisions held that non-rollover IRAs were subject to creditors' claims and would become part of a bankruptcy estate. …

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