Debtor Cannot Exempt His Interest in Ex-Wife’s Retirement Accounts

Posted by NCBRC - November 13, 2018

Accounts the debtor received from his ex-wife in a divorce were not retirement accounts for bankruptcy exemption purposes because, even though his ex-wife had contributed to the accounts for retirement, his interest was merely through a property settlement. Lerbakken v. Sieloff and Assoc., P.A., No. 18-6018 (B.A.P. 8th Cir., Oct. 16, 2018).

The bankruptcy court disallowed chapter 7 debtor, Brian Lerbakken’s, claimed exemptions for a 401K account and an IRA that he had received in a property settlement when he and his wife divorced. The funds in the accounts were contributed in their entirety by his ex-wife.

On appeal, the BAP applied section 522(d)(12) under which accounts are exempt if they are 1) made up of retirement funds, and 2) they are not taxable under specified sections of the Internal Revenue Code. Mr. Lerbakken argued that the tax-exempt status of his wife’s interest in the accounts adhered to his benefit when the accounts were transferred to him. The panel disagreed. Relying on Clark v. Rameker, 134 S. Ct. 2242 (2014), the panel found that “the exemption is limited to individuals who create and contribute funds into the retirement account. Retirement funds obtained or received by any other means do not meet this definition.”

Mr. Lerbakken argued in the alternative that the accounts were marital property and that funds were contributed with the expectation that they would support both Mr. Lerbakken and his then-wife in their retirement, and that he, in fact, intended to use the funds in his retirement. Relying on Clark, the panel declined to consider Mr. Lerbakken’s subjective intentions with respect to the funds. Rather, the panel applied an objective test and found that Mr. Lerbakken’s interest in the accounts arose out of a property settlement and did not meet the definition of retirement account.

The debtor filed a notice of appeal to the Eighth Circuit on November 7, 2018, Case No. 18-3415.

Lerbakken 8th BAP Oct 2018


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