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Florida Bar Journal

The Robertson Case: A Beneficiary by Any Other Name Is Still a Beneficiary

Real Property, Probate and Trust Law

When does the term “beneficiary” not mean “beneficiary”? In the recent case of Robertson v. Deeb, 16 So. 3d 936 (Fla. 2d DCA 2009), the court determined that an interest of a beneficiary of an inherited individual retirement account (IRA) was not an exempt asset protected from creditors under the terms of F.S. §222.21, even though the statute has, by its terms, protected the interests of a “beneficiary” in an IRA since it was originally enacted in 1987. The authors respectfully disagree with the decision in this case. As Robertson is a case of first impression in Florida, the authors believe it addresses an issue of great importance, potentially affecting thousands of nonspouse beneficiaries of IRAs and other types of tax-qualified plans or accounts in Florida.

The Name of the IRA Game
IRAs are a form of a retirement account established in accordance with I.R.C. §408 or §408A. Although IRAs and other types of qualified or tax-deferred plans are creatures of the Code, state laws may impact these accounts. Examples of state laws that could impact retirement accounts are guardianship and intestacy laws, principal and income act provisions, elective share statutes, trust statutes, real estate statutes, and bankruptcy exemption statutes, such as those relied upon in the Robertson case. Every state has a different statutory scheme, and the decision as to which state’s law applies depends on the issue at hand and whether the issue is based upon the domicile of the IRA owner, the IRA beneficiary, or the state law specified in the IRA agreement.

Qualified plans and IRAs present an estate and asset protection planning challenge because they cannot (except in the case of divorce) be transferred from the IRA owner to anyone else during lifetime without losing tax-deferred status. The primary goal of most clients is to preserve and maximize the tax-deferred growth opportunities provided by these types of accounts. In fact, many clients choose to leave this type of asset to children or grandchildren for the enhanced income tax-deferral opportunities. This appears to be one of the reasons that the Pension Protection Act of 2006 includes provisions for nonspouse beneficiaries of qualified plans to roll those assets into “inherited” IRAs after the death of the plan participant.1 However, under federal bankruptcy law, assets that a beneficiary elects to leave in a qualified plan would be protected from the beneficiary’s creditors, whereas the protected status of those assets transferred into an “inherited” IRA in Florida has now been called into question.

The RobertsonCase
In Robertson, Kevin J. Deeb sued Richard A. Robertson on a promissory note. Deeb obtained a judgment of $188,000 against Robertson and served a writ of garnishment against RBC Wealth Management (RBC), the custodian of an IRA that Robertson had inherited from his father, Harold Robertson.

Under federal law, if an IRA owner dies and has named a beneficiary of the IRA who is either an individual or a trust that meets certain requirements, then the beneficiary of that IRA is allowed, under federal law, to transfer the IRA from the name of the deceased IRA owner into an IRA titled in the decedent’s name as owner (deceased) for benefit of the beneficiary. This is commonly referred to as an “inherited IRA.” The advantage of creating an inherited IRA is that, if done properly, the Code allows the required minimum distributions from the IRA to be spread out over the life expectancy of the beneficiary, as opposed to that of a presumably older IRA owner, and no premature distribution penalties are assessed against the beneficiary, regardless of his or her age.2 This is true whether the beneficiary is a spouse or a nonspouse, unless the spouse rolls it into their own name, at which point the spouse becomes the owner.

In Robertson, RBC, the custodian of the IRA, informed Robertson that he had two options with respect to the distribution of his father’s IRA. The first option was to transfer his father’s IRA into an “inherited IRA,” which would require that he take minimum distributions3 based on Robertson’s remaining life expectancy, with the ability to withdraw more than the minimum distributions without a penalty. The second option was to keep the IRA in his father’s titled account and take distributions over five years without penalty.4 Robertson chose the first option. The funds were transferred from his father’s IRA into an inherited IRA, properly titled “Richard Robertson, Beneficiary, Harold Robertson, Decedent RBC Capital Markets, Custodial IRA.”

The issue before the Second District Court of Appeal was whether Robertson’s interest in the inherited IRA was exempt from garnishment. The lower court had held that it was not exempt because the “account became Robertson’s property and no longer qualified for the same exemptions from taxation.”5 Further, the lower court had determined that Robertson’s inherited IRA was “not like an IRA in terms of taxing and penalty tax for early withdrawal and things of that nature so I don’t think that’s what [the legislature] meant.6

Robertson argued — correctly, in the authors’ opinion — that under F.S. §222.21(2)(a), he was a “beneficiary” of a “fund or account” and, therefore, his beneficial interest in the inherited IRA was exempt. However, the appellate court agreed with the lower court and concluded that the inherited IRA was not exempt.

The appellate court determined that the statute did not “exempt the money or assets at issue”7 unless such amounts were maintained in the original “fund or account.” The court reasoned that the inherited IRA was a different fund or account that was “created when the original fund or account passes to a beneficiary upon the death of the participant.”8 The court also conditioned the exemption as “identified by its tax-exempt status,”9 and concluded that once the IRA was distributed upon the death of the original owner, the inherited IRA’s tax-exempt status changed. The court stated that while inherited IRAs are exempt from taxes until distributions are made to the beneficiary, beneficiaries of inherited IRAs are required to take distributions. The court did not note that, generally, the original owner is also required to take minimum distributions upon reaching age 70 ½. Nor did the court appear to recognize that a spouse who inherits an IRA is ultimately required to take distributions either by stepping into the shoes of the owner by rolling it over or by taking distributions as a beneficiary.

Additionally, the court seemed to make a distinction between leaving the IRA in the name of the decedent and withdrawing the funds over five years, and transferring the original IRA into an “inherited IRA.” There is no basis for such a distinction under state law, in the Code, or under federal bankruptcy law.

The court then analyzed cases from other states and relied on an Oklahoma bankruptcy case,10 which denied an exemption for a beneficiary of an inherited IRA based on an Oklahoma statute. The Oklahoma law exempts assets “only to the extent that contributions by or on behalf of a participant were not subject to federal income taxation to such participant at the time of such contribution.”11 The language in the Oklahoma statute is not in the Florida statute. The court noted that in the Oklahoma case “(t)he purpose of the [l]egislature in exempting individual retirement accounts is to allow debtors to preserve assets which have been earmarked for retirement in the ordinary course of the debtor’s affairs. Such a purpose would not be served by upholding the (beneficiary’s) request to keep his interest in the IRA as exempt.”12

A recent decision from Minnesota illuminates the issue in Robertson quite well. In re: Nessa,105 AFTR 2010-XXXX (Jan. 11, 2010), is a Minnesota bankruptcy case with a fact pattern similar to Robertson, except that the debtor, in this case, claimed an exemption for the IRA inherited from her father under the federal statute, 11 U.S.C. §522(d)(12). The trustee objected to the exemption, arguing that inherited IRAs do not qualify under the statute. The court disagreed and overruled the objection. The court in Nessa cited language contained in IRS Publication 590, Individual Retirement Arrangements, which states in part: “If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. This means that you cannot make any contributions to the IRA. It also means you cannot roll over any amounts into or out of the inherited IRA.”

The IRA beneficiary in Nessa had properly transferred the funds into an inherited IRA, much as Robertson did in the case at hand. The court in Nessa concluded that the tax-deferred character of the IRA did not change because the IRA was transferred into an inherited IRA. Further, the trustee did not claim that the IRA was not in compliance or that the funds in the inherited IRA were not exempt from taxation until they were distributed.

The History of the Statute
F.S. §222.21 was enacted in 1987,13 with amendments in 1998,14 1999,15 2005,16 and 200717 that do not affect the provisions of the statute discussed in the Robertson case. The applicable portions of the statute currently provide as follows:

(2)(a) Except as provided in paragraph (d), any money or other assets payable to an owner, a participant, or a beneficiary from, or any interest of any owner, participant, or beneficiary in, a fund or account is exempt from all claims of creditors of the owner, beneficiary, or participant if the fund or account is.. . [Provisions in the statute, providing that the creditor protection inures to the benefit of the persons described above as long as the fund or account is tax-qualified, are omitted.].

(c) Any money or other assets that are exempt from claims of creditors under paragraph (a) do not cease to qualify for exemption by reason of a direct transfer or eligible rollover that is excluded from gross income under s. 402(c) of the Internal Revenue Code of 1986.18

The original statute was intended to ensure that the creditor protection of a qualified plan created under the Code that contains a spendthrift clause to implement the anti-alienation rules of I.R.C. §401(a)(13) also applied to single owner/participant plans.19 There was a concern that bankruptcy courts were permitting creditors to attach single owner/participant plans on the theory that the plan, that was required to have a spendthrift provision, was a self-settled trust which, then and now, does not defeat claims of the settlor’s creditors. This statute was enacted to make clear that all plans would be exempt even if there were a single owner/participant.

Further, one of the original drafters, who testified before the Florida House and Senate, has confirmed to the authors that the intent of the word “beneficiary” under the statute was to mean any beneficiary, including not only the beneficiary of the original IRA, but also a beneficiary of an inherited IRA. Further, a Florida Bar Journal article co-authored by the same drafter soon after the statute was enacted indicates that the legislation “should protect from creditors (sic) interests in all types of tax qualified retirement plans (including…individual retirement accounts).”20 The legislation used the word “beneficiary” with no qualifiers. The drafters and the legislature could have denied or limited protection afforded to IRA beneficiaries. Neither did so.

In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) became effective, and the Florida statute was amended to mirror the changes in BAPCPA.Paragraph 2(c) was added to F.S. §222.21(2), stating, in part, “Any money or other assets that are exempt from claims of creditors under paragraph (a) do not cease to qualify for exemption by reason of a direct transfer or eligible rollover that is excluded from gross income….” This language was added to clarify that tax-qualified funds could be rolled over or transferred between accounts without losing the protection intended to be afforded by the Federal statute. Furthermore, certain provisions of EGTRRA21 were intended to create more flexibility in tax-qualified accounts, allowing IRA owners to roll IRA funds into qualified plans, qualified plan funds into other qualified plans, and attempting to make tax-qualified funds more manageable.

No change was made to the language regarding beneficiaries, owners, or participants. In fact, the Florida Session Law analysis states that the change “is made because technically the owner of an IRA is neither a beneficiary nor a participant in the account.”22 It is, therefore, clear that the term, “beneficiary,” is not the same as the term, “owner,” of an IRA.

The Clear Meaning of the Statute
The well-reasoned brief by Robertson’s attorney points out that Robertson was listed by RBC as a beneficiary of the account.23 Survivor beneficiaries should be provided the same protection under the statute as that afforded to the actual contributors because no distinction has been made between the two in the statute. The language as to whose interests are protected is clear and unambiguous. When the language of a statute is clear and unambiguous and conveys clear meaning, the statute must be given its plain and ordinary meaning.24 In such instances, courts will not go behind the plain and ordinary meaning of the words used in the statute unless an unreasonable or ridiculous conclusion would result from a failure to do so.25

In LeCroy v. McCollam, 612 So. 2d 572 (Fla. 1992), the Supreme Court considered whether a structured settlement in a wrongful death claim constituted an annuity under F.S. §222.14, and, therefore, was exempt from creditor claims. The legislature has not defined the term, “annuity contracts” in Ch. 222. Thus, the court looked to other chapters of the Florida Statutes for guidance as to the meaning of the word. Similarly, the term “beneficiary” is not defined in Ch. 222, but F.S. §736.0103 provides that the term “beneficiary” includes a person who has a present or future beneficial interest in a trust, vested or contingent, and F.S. §736.1106 defines a “beneficiary” as the beneficiary of a future interest and includes a class member if the future interest is in the form of a class gift.

Robertson’s status with regard to the IRA in question is fairly described by any one of the foregoing definitions, and there is no differentiation in F.S. §222.21(2)(a) between survivor beneficiaries and owner beneficiaries. Moreover, Florida has a longstanding policy that favors liberal construction of exemption statutes so as to prevent debtors from becoming public charges.26

Some may argue even though the language may be clear, it is not the intent of the legislature to protect the beneficiaries of an account because the beneficiary did not “earn” or contribute to the account. The legislature has not enacted any such policy. When a beneficiary receives proceeds from annuities, those proceeds are exempt from the beneficiary’screditors. To find that an inherited IRA beneficiary would not be protected would encourage IRA holders to purchase so-called “individual retirement annuities” to qualify under the exemption statute for annuities. It is the authors’ opinion that the legislature would not want to unduly encourage IRA owners to purchase retirement annuities. Qualified or retirement annuity sales are an area rife with abuse and are currently the subject of several national class action suits.

Further Reading of the Statute Confirms Exempt Treatment
F.S. §222.21(2)(c) specifically states that assets that are exempt from claims of creditors under paragraph (a) do not cease to qualify for exemption “by reason of a direct transfer or eligible rollover that is excluded from gross income under s. 402(c) of the Code.” I.R.C. §402(c)(11) specifically addresses distributions to inherited IRAs of nonspouse beneficiaries from qualified plans. The Code states that if “a direct trustee-to-trustee transfer is made to an individual retirement plan” from a qualified trust under I.R.C. §401(a) “for the purposes of receiving the distribution on behalf of an individual who is a designated beneficiary,…the transfer shall be treated as an eligible rollover distribution.”27

The Robertson court agreed that an IRA owned by the original owner is exempt from creditor’s claims under F.S. §222.21(2)(a). However, the court reasoned that “the plain language of that section references only the original ‘fund or account.’”28 I.R.C. §402(c)(11) provides that the transfer to an inherited IRA is an eligible rollover. F.S. §222.21(2)(c) provides that the exemption does not cease as to eligible rollovers or transfers (which are nontaxable events). Therefore, the statute clearly provides that Robertson’s interest in the inherited IRA was exempt from creditor claims.

The term “IRA owner” is a term of art used in the Code. Under I.R.C. §408, the inherited IRA continues the tax-exempt status afforded to the original IRA owner. When the beneficiary establishes the inherited IRA, the beneficiary becomes the beneficial or equitable owner of that inherited IRA. F.S. §222.21(2)(a) confers an exemption on “owners” if the plan is maintained in accordance with a plan or governing instrument that has been determined by the IRS to be exempt from taxation under the relevant provisions of the Code. Nothing in the statute states that the word “owner” must be the original IRA owner. Thus, it can be argued that the inherited IRA, which is owned in equity by the beneficiary, is exempt from claims of creditors under the protection the statute affords to “owners.”

Planning With a Modicum of Caution
Simple steps can be taken in order to protect IRA funds in light of this errant decision. If the IRA owner is concerned about the vulnerability of the IRA to creditors when the IRA reaches the hands of the beneficiary, instead of naming the beneficiary directly, the IRA owner may wish to create a spendthrift trust specifically for that beneficiary. The owner would then designate the trust, and not its beneficiary, as the IRA beneficiary. Finally, while the purchase of an annuity may have disadvantages in certain circumstances, if an IRA owner has reason to believe that the beneficiary could have creditor issues or is at risk for bankruptcy, under current Florida law apart from the Robertson case, an annuity would seem to provide the protection sought.

The statutory treatment of exemptions for all forms of IRAs is a very hot topic in the current economic environment and no doubt will continue to be a hot topic for years ahead, as it is estimated that over $14 trillion dollars are either currently held in IRAs or are held in qualified plans that will eventually roll over into IRAs. Creditors are becoming more aggressive and more creative in their attempts to attack these types of accounts. As such, it is extremely important that the law is clearly interpreted. It is not the intent of the authors to change existing policy, but rather to confirm the intent of the original drafters, as well as the drafters of subsequent amendments to F.S. §222.21, that the interests of beneficiaries of IRAs, in whatever form,are protected. While the case of Robertson is the law in the Second District Court of Appeal, the authors hope this will not be the final answer to this timely issue.

1 The Pension Protection Act of 2006, P.L. 109-280 (Aug. 17, 2006).

2 I.R.C. §401(a)(9) (1986) as amended and related regulations.

3 Id.

4 Robertson, 16 So. 3d at 937.

5 Id. at 938.

6 Id. (emphasis added).

7 Id.

8 Id.

9 Id. at 939.

10 In re Sims, 241 B.R. 467 (Bankr. N. D. Okla. 1999).

11 Id. at n. 2.

12 Robertson, 16 So. 3d 936, 937.

13 Fla. Laws Ch. 87-375, §1.

14 Fla. Laws Ch. 98-159, §1.

15 Fla. Laws Ch. 99-8, §25.

16 Fla. Laws Ch. 2005-8, §5.

17 Fla. Laws Ch. 2007- 74, §1.

18 Fla. Stat. §222.21(2)(a) (emphasis added).

19 See E. Jackson Boggs and Steven K. Barber, New Florida Statute Protects Retirement Plan Assets for Claims of Creditors, 61 Fla. B. J. 51 (Nov. 1987).

20 Id. at 52.

21 Economic Growth and Tax Relief Reconciliation Act of 2001.

22 Staff Analysis S.B. 660 (March 22, 2005).

23 Initial Brief of Appellant; Appeal No. 2 D08-6428, at 78.

24 LeCroy v. McCollam, 612 So. 2d 572 (Fla. 1993); Streeter v. Sullivan, 509 So. 2d 268 (Fla. 1987).

25 Holly v. Auld, 450 So. 2d 217 (Fla. 1984).

26 Goldenberg, 791 So. 2d at 1081.

27 I.R.C. §402(c)(11)(A)(i).

28 Robertson, 16 So. 3d at 938.

Linda Suzzanne Griffin is an AV-rated attorney who practices in the areas of estate planning, trusts, wills, probate, and taxation in Clearwater and has her own firm, Linda Suzzanne Griffin, P.A. She is board certified in taxation and wills, trusts, and estates. She is also a fellow of the American College of Estates and Trust. She is a member of the executive council for The Florida Bar Real Property and Probate Trust Law Section, vice-chair of the IRA and Employee Benefits Committee, a member of the Estate and Trust Tax Planning Committee, and the Asset Protection Committee.

Kristen M. Lynch is a trusts and estates partner in the Ft. Lauderdale office of Ruden McClosky. She has over 20 years of experience specific to IRAs regarding estate planning, post-mortem issues, asset protection issues, institutional compliance, and self-directed investments, both as an attorney and as a trust officer.

This column is submitted on behalf of the Real Property, Probate and Trust Law Section, John B. Neukamm, chair, and William P. Sklar and Richard R. Gans, editors.

Real Property, Probate and Trust Law