In re Hamm

• Decision Date: 09 July 2018
• Docket Number: Bankruptcy No. 17-81489
• Parties: IN RE: Penny C. HAMM, Debtor.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois

586 B.R. 745

IN RE: Penny C. HAMM, Debtor.

Bankruptcy No. 17-81489

United States Bankruptcy Court, N.D. Illinois, Western Division.

Signed July 9, 2018

Paul R. Idlas, Law Offices of Paul R. Idlas, Grayslake, IL, for Debtor.

MEMORANDUM OPINION

Thomas M. Lynch, United States Bankruptcy Judge

This matter comes before the court on the Chapter 7 trustee's objection to the Debtor's claim that the funds she holds in an Edward Jones account are exempt as retirement plan assets under 735 Ill. Comp. Stat. 5/12-1006. (ECF No. 26. (the "Objection").) The Debtor, Penny C. Hamm, had been listed as a beneficiary on her mother's retirement account. After her mother died, Ms. Hamm opened a new "Individual Retirement Account" at Edward Jones with proceeds from her mother's account. The Debtor now asserts the funds in her account qualify for the state exemption. The case trustee objects on the grounds that the account is an inherited retirement account, arguing that the holding in Clark v. Rameker, ––– U.S. ––––, 134 S.Ct. 2242, 189 L.Ed.2d 157 (2014) that such accounts do not qualify for the federal exemption for retirement funds under 11 U.S.C. § 522 should apply equally to the Illinois exemption. The Debtor maintains that the funds are exempt, arguing among other things that the Illinois statute provides a broader exemption than the federal exemption considered in Rameker.

For the reasons discussed below, this court finds that the account does not qualify for the Illinois' exemption for retirement plans and will sustain the trustee's objection on that ground.

JURISDICTION

The Court has jurisdiction to decide this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. The allowance or disallowance of exemptions from property of the estate is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B). Matters such as this arise from the Debtor's bankruptcy, indeed "stem[ ] from the bankruptcy itself," and, therefore, this court has constitutional and statutory authority to decide this matter. Stern v. Marshall, 546 U.S. 500, 126 S.Ct. 1235, 163 L.Ed.2d 1097 (2006).

PROCEDURAL AND FACTUAL BACKGROUND ¹

The facts are largely undisputed. The parties have elected to stand on their briefs and accompany exhibits, to which no objections were raised, without calling witnesses. Debtor Penny Hamm, a resident of Island Lake, Illinois, filed her bankruptcy petition under Chapter 7, together with schedules, on June 22, 2017. In Schedule A/B, she listed as a "retirement or pension" account what she described as an "IRA" account at Edward Jones valued at $16,000. She claimed an exemption under " 735 ILCS 5/12-1006" for property described as "Edward Jones" in her Schedule C asserting an exemption of $16,000 and listing her value in the asset as $16,000. After the Chapter 7 trustee objected to her claim of exemption under section 5/1/12-1006 (ECF No. 26), the Debtor amended Schedule C to claim a $2,113.00 exemption in the Edward Jones account pursuant to the Illinois wildcard exemption, 735 ILCS 5/12-1001(b).² By doing so she reduced her claim of exemption under 735 ILCS 5/12-1006 to $13,887.00. During oral argument the Debtor's attorney explained that the Debtor was asserting the remainder of her wildcard exemption for the account "in the alternative" and to "hedge her bets" in case the claim of exemption under section 12-1006 is denied. The trustee does not object to the claimed wildcard exemption.

The parties agree that the funds in the Debtor's Edward Jones account derive from a pre-petition inheritance, namely, an IRA account maintained by the Debtor's mother at Edward Jones. The Debtor's mother passed away on March 6, 2017. At oral argument Debtor's counsel represented, and the trustee does not dispute, that at the time of her mother's death the Debtor was one of four or five designated beneficiaries on the mother's IRA account.

The parties also do not dispute that a new account was opened at Edward Jones with the Debtor's portion of the mother's account.³ The court received without objection a copy of an "Individual Retirement Account Authorization Form and Beneficiary Designation" signed by the Debtor on March 28, 2017 (the "2017 Authorization"), by which the Debtor agreed to the terms of the attached Edward Jones Traditional Individual Retirement Account Custodial Agreement.⁴ In the 2017 Authorization the Debtor designated her own primary beneficiaries (ECF No. 44).

DISCUSSION

Even though an IRA account may "automatically pass[ ] to the participant's beneficiary, by operation of the contract" upon the participant's death, "some IRA providers reserve one or more of" the titles "inherited IRA," "beneficiary IRA" or "decedent IRA" "exclusively for an account that the beneficiary has opened to receive and/or hold death benefits payable to such beneficiary from a decedent's plan or IRA." NATALIE B. CHOATE, LIFE AND DEATH PLANNING FOR RETIREMENT BENEFITS 254 (7^th Ed. 2011). The account at issue here appears to be of the latter type. Rather than "simply retitling the account to reflect [the participant's] death," the multiple beneficiaries here appear to have requested that the account be divided into separate accounts in what is sometimes referred to as "an IRA-to IRA transfer." Choate at 259. In such a transfer, a portion of the participants' "IRA assets is moved via IRA-to-IRA transfer to each child's separate inherited IRA." Id. As explained in IRS private letter rulings,

Revenue Ruling 78-406, 1978-2 C.B. 157 ("Rev. Rul. 78-406"), provides that the direct transfer of funds from one IRA trustee to another IRA trustee, even if at the behest of the IRA holder, does not constitute a payment or distribution to a participant, payee or distributee, as those terms are used in section 408(d) of the Code. Furthermore, such a transfer does not constitute a rollover distribution. Rev. Rul. 78-406 is applicable if the trustee-to-trustee transfer is directed by the beneficiary of an IRA after the death of the IRA owner as long as the transferee IRA is set up and maintained in the name of the deceased IRA owner for the benefit of the beneficiary.

I.R.S. P.L.R. 201503024 (Jan. 16, 2015).

Such appears to be the case here and the Debtor has not contended otherwise. The 2017 Authorization is the sole document signed by the Debtor with respect to the account submitted to this court. It designates the account as an "Inherited IRA." (ECF No. 44.) The 2017 Authorization lists and is signed by the Debtor alone as "Owner/Custodian/Guardian." The Debtor's mother is identified as a "deceased individual" in the document which further lists as "Destination: New Accounts." (Id. )

The Debtor does not contend that the new account itself is a newly-formed and qualified traditional IRA, as opposed to an "inherited individual retirement account" as such term is used in 26 U.S.C. § 408(d)(3)(C). Somewhat confusingly, the 2017 Authorization form marks the "type" of account as both a "Traditional IRA" and as an "Inherited IRA." However, the court concludes from the document that the reference to "Traditional IRA" refers to the original account while "Inherited IRA" refers to the newly formed account opened to receive the Debtor's interest in the original account as beneficiary. While the unsigned "custodial agreement" attached to the authorization form includes language that "I am establishing a traditional Individual Retirement Account (IRA) under Section 408(a) of the Internal Revenue Code of 1986," neither party has contended that the newly-formed account qualifies as a traditional IRA account. The "agreement" does not contain any specific references to the Debtor. Indeed no evidence has been presented to show that this "agreement" was attached to the 2017 Authorization form for any purpose other than to incorporate certain of its terms into the form agreement. Notably, the 2017 Authorization form states in bold "I ACKNOWLEDGE THAT THE TRADITIONAL INDIVIDUAL RETIREMENT ACCOUNT CUSTODIAL AGREEMENT CONTAINS ON PAGE 6, ARTICLE VIII, SECTION 16, A BINDING ARBITRATION PROVISION, WHICH MAY BE ENFORCED BY THE PARTIES. " (ECF No. 44.)

Despite the language in the attachment referring to "a traditional Individual Retirement Account," the new agreement under these circumstances, does not constitute a qualified traditional IRA. The written governing instrument must prohibit contributions other than in cash or qualified rollovers in order to qualify as an individual retirement account under 26 U.S.C. § 408(a). Section 408(a) further provides that any amount received by an individual from an "inherited individual retirement account" (defined in the same subsection to exclude accounts inherited from spouses) is not a qualified rollover. 26 U.S.C. § 408(d)(3)(C). If the newly formed account permitted rollover from the inherited IRA, as is the case, it will not qualify as an individual retirement account despite any designation to the contrary. See also, Clark v. Rameker , ––– U.S. ––––, 134 S.Ct. 2242, 2245, 189 L.Ed.2d 157 (2014) ("When anyone other than the owner's spouse inherits the IRA, he or she may not roll over the funds; the only option is to hold the IRA as an inherited account.").

Instead, the Debtor contends that Illinois permits exemption of inherited individual retirement accounts under 735 ILCS 5/12-1006. The trustee disagrees and objects primarily on the basis of authority interpreting the federal exemption statute. The Seventh Circuit, as affirmed by the Supreme Court, has determined that an inherited IRA does not fall within the scope of "retirement funds" exempted under section 522(b)(3)(C) of the Bankruptcy Code. In re Clark , 714 F.3d 559 (7th Cir. 2013), aff'd by Clark v. Rameker , ––– U.S. ––––, 134 S.Ct. 2242, 189 L.Ed.2d 157 (2014). The trustee contends that the same result should apply to the Illinois exemption for "retirement plans." 735 Ill. Comp. Stat. 5/12-1006(b).

The final...