Aronsohn & Springstead v. Weissman

• Decision Date: 19 January 1989
• Citation: 230 N.J.Super. 63,552 A.2d 649
• Parties: ARONSOHN & SPRINGSTEAD and Richard F. Aronsohn, Plaintiffs-Respondents, Cross-Appellants, v. Jonas WEISSMAN, Defendant-Appellant, Cross-Respondent.
• Court: New Jersey Superior Court — Appellate Division

Page 63

230 N.J.Super. 63

552 A.2d 649

ARONSOHN & SPRINGSTEAD and Richard F. Aronsohn, Plaintiffs-Respondents, Cross-Appellants, v. Jonas WEISSMAN, Defendant-Appellant, Cross-Respondent.

Superior Court of New Jersey,

Appellate Division.

Argued Jan. 4, 1989.

Decided Jan. 19, 1989.

Jack Jay Wind, for defendant-appellant, cross-respondent (Margulies, Wind, Herrington & Katz, attorneys, Jack Jay Wind, Jersey City, on the brief).

Richard H. Weiner, for plaintiffs-respondents, cross-appellants (Aronsohn, Springstead & Weiner, attorneys, Richard F. Aronsohn, Hackensack, and Mark S. Paige, on the brief).

Before Judges PRESSLER, O'BRIEN and SCALERA.

The opinion of the court was delivered by

PRESSLER, P.J.A.D.

The issue of first impression raised by this appeal is whether a so-called Keogh retirement plan maintained by a self-employed professional for his own exclusive account may be levied upon by a judgment creditor under a writ of execution. The trial judge, concluding that such an account is not exempt from execution, issued a turnover order requiring the depository bank to transfer to the Sheriff funds from such an account sufficient to pay the judgment. The judgment debtor appeals, and we affirm.

Plaintiff Aronsohn and Springstead is a law firm in Bergen County. Plaintiff Richard H. Aronsohn, a partner in the firm, represented defendant Jonas Weissman, a physician, in marital litigation. Weissman was dissatisfied with Aronsohn's bill for legal services, and this dispute was ultimately arbitrated by a District Fee Arbitration Committee pursuant to R. 1:20A. The Committee issued its written determination on March 21, 1988 finding that Aronsohn was entitled to $18,081.60, the full amount of the balance due on his final bill. That determination was reduced to judgment on May 20, 1988. Aronsohn thereafter obtained a writ of attachment authorizing the Bergen County Sheriff to attach Weissman's property, and on June 14, 1988, the Sheriff reported his attachment of "all the right, title and interest of the defendant, Jonas Weissman, in and to monies of the aforementioned defendant in a Keogh Account Number 22-625265," in the amount of $18,081.60, located at Columbia Savings & Loan Association, in Fair Lawn. The total amount of the account is about $175,000. On notice to defendant and the bank, a writ of execution issued, and following a hearing on the return date of an order to show cause, the turnover order here appealed from was entered.

The only issue before the trial court and before us is whether a qualified "Keogh" ¹ account is subject to execution by a judgment creditor. Defendant argues that it is immunized from execution by the Internal Revenue Code (Code) and, more particularly, 26 U.S.C.A. § 401(a)(13)(A), which conditions qualification of a retirement trust for the favorable income tax treatment afforded by the Code upon the plan's express provision that the benefits provided thereby "may not be assigned or alienated." Defendant also relies on the implementing regulation, 26 C.F.R. § 1.401(a)-13(b)(1), which further provides that the trust will not be qualified unless the plan stipulates "that benefits provided under the plan may not be anticipated, assigned (either at law or in equity), alienated or subject to attachment, garnishment, levy, execution or other legal or equitable process."

Defendant's thesis is further predicated on the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C.A. § 1001, et seq., enacted to regulate and protect welfare and pension plans created and maintained by employers or employee associations for the benefit of employees. ERISA, he argues, by reason of 29 U.S.C.A. § 1056(d)(1), which is virtually identical in verbiage to 26 U.S.C.A. § 401(a)(13)(A), clearly insulates an employee's interest in a retirement plan from creditors. See, e.g., Helmsley-Spear, Inc. v. Winter, 74 A.D.2d 195, 426 N.Y.S.2d 778 (1980), aff'd o.b. 52 N.Y.2d 984, 438 N.Y.S.2d 79, 419 N.E.2d 1078 (Ct.App.1980). And see Mackey v. Lanier Collections Agency, 486 U.S. 825, 108 S.Ct. 2182, 100 L.Ed.2d 836 (1988). He contends that the anti-alienation language of 26 U.S.C.A. § 401(a)(13)(A) should be accorded the same exemption consequence in respect of the self-settled "Keogh" trusts of self-employed persons. He further points out that a breach of the anti-alienation provisions of the Code and implementing regulation which might be affected by execution on his Keogh account would result in its disqualification for favorable tax treatment and the imposition upon him pursuant to the Code of the consequent burden of the tax penalties therein provided. ² Congressional policy, he argues, would be violated by such disparate treatment of beneficiaries of employer-created plans and beneficiaries of self-settled plans.

We disagree. We start from the premise that the Internal Revenue Code, and particularly 26 U.S.C.A. § 401(a)(13)(A), speaks only to the federal income tax consequences of premature alienation of a Keogh trust. Thus, the Code does not forbid involuntary alienation by execution under state law but only provides for the tax consequences thereof. The question then, as we see it, is essentially one of basic trust law and the only effect of the Code is whether those consequences are of sufficient moment to require a contrary result.

The self-employed person's qualified Keogh plan is, in effect, a self-settled trust in which the funds are provided by the settlor, who retains control over their management and who is exclusively entitled thereto. He is also free to terminate the trust and to withdraw the accumulated funds at any time subject only to payment of a tax penalty if he does so prior to the retirement age stipulated in the plan. ³ See, e.g., Rayndon and Anderson, "Attachment of Keogh Plan Assets--A Confusion in the Law and the Courts," 61 Taxes 525 (1983). These characteristics of a Keogh trust are, of course, in complete contradistinction to an ERISA retirement plan created by a separate employer or employee association for the benefit of employees. See, e.g., Hebert v. Fliegel, 813 F.2d 999, 1001 (9th Cir.1987), distinguishing between the two as follows:

The latter [employer-granted plans] are funded and controlled by the employer, and carry with them well-defined, employer-determined guidelines on when an employee's interest in the funds vests and when such funds may be withdrawn.

Keogh plans, on the other hand, are funded exclusively by the self-employed individual, who retains complete control over the amounts invested and the management of the funds. This individual also retains the right to terminate the plan and withdraw the funds at any time, subject only to a tax penalty. [footnote omitted]

Clearly then, in respect of the employer-granted plan, the employee beneficiary has no right of unilateral "premature" access, penalty or not. The self-settlor of a Keogh plan does.

The deferred-benefit character of both Keogh and employer-granted plans coupled with their anti-alienation stipulations endow both with the essential attributes of a spendthrift trust. See, generally, Rayndon and Anderson, supra, 530-531. And see, defining the spendthrift trust, 1 Restatement 2d, Trusts, § 152(2), 311 (1959), providing that "a trust in which by the terms of the trust or by statute a valid restraint on the voluntary and involuntary transfer of the interest of the beneficiary is imposed is a spendthrift trust." While the restraint on involuntary alienation of a spendthrift trust is generally valid, defeating the right of creditors of the beneficiaries thereto, it is uniformly recognized as a matter of both common and statutory law that the self-settled spendthrift trust is not entitled to that protection. Thus, the Restatement rule is that

Where a person creates for his own benefit a trust with a provision restraining the voluntary or involuntary transfer of his interest, his transferee or creditors can reach his interest. [Restatement, supra, § 156(1) at 326]

And see 2 Scott, Trusts, § 156 at 1190-1191 (3d ed.1967); Bogert, Trusts, § 223 at 438-439 (2d ed. 1979). While this principle has not apparently been addressed by any reported case in this jurisdiction, it is nevertheless a matter of legislative recognition. Thus, N.J.S.A. 3B:11-1, formerly N.J.S.A. 3A:42-1, provides that

The right of any creator of a trust to receive either the income or the principal of the trust or any part of either thereof, presently or in the future, shall be freely alienable and shall be subject to the claims of his creditors, notwithstanding any provision to the contrary in the terms of the trust.

And N.J.S.A. 2A:17-57, et seq., directly addressing the rights of execution creditors, expressly authorizes execution against the debtor's self-settled trust. And finally, N.J.S.A. 25:2-1 provides that a self-settled trust "shall be void as against [the settlor's] creditors." Thus, as Rayndon and Anderson, supra, at 530-531, conclude, a Keogh plan is clearly, in essence, a self-settled spendthrift trust--reachable by the settlor-beneficiary's creditors. As they explain,

In other words, the employer who created the plan is also a beneficiary of the plan. Statutes and cases in the law of trusts have repeatedly held that a spendthrift trust created by the settlor and which names him or her as sole beneficiary of the trust res is void as against present and future creditors. Those creditors may reach the funds held in trust in order to satisfy their claims against the beneficiary. Creditors of the sole beneficiary of a self-settled spendthrift trust may satisfy their claims against the beneficiary from the principal and income of the trust fund because it is against public policy to permit a person to tie up property in such a way that he can enjoy it but prevent creditors from reaching it. [Ibid.]

The essential nature of the Keogh plan as a self-settled spendthrift trust has impelled the courts of New...