Did Transfer of IRA Proceeds Lose Protection Prior to Bankruptcy?

A prospective Chapter 7 bankruptcy client told me he had recently withdrawn substantial money from his IRA and had given the money to his adult son. The client intended to buy a house to be used as his new homestead, but he had bad credit. The son had good credit. The client gave the IRA money to his son so that the son could qualify to buy the house in the son’s name. Subsequently, the son would transfer title to the parents. The client withdrew the IRA proceeds and deposited the money in his own account before transferring the same money by written check to the son. The issue was whether the money in the son’s account is protected if the parent files bankruptcy. Was the transfer of the money to the son a fraudulent transfer?

This is one of those situations where innocent planning error could undermine valid substantive planning. The IRA was exempt from creditors and the bankruptcy trustee under Florida statutes. The IRA statutes do not expressly protect proceeds from IRA or other qualified pensions; in contrast, the statutes expressly protect annuity proceeds. There are some court decisions which hold that the legislature intended to protect the proceeds of retirement accounts, but the law is not clear.

There can be no fraudulent transfer of an exempt asset by definition. If the client transferred the money directly from the IRA account into the son’s financial account I do not think any creditor could attack the transfer as fraudulent if the transfer was a gift to the son. But, when the creditor withdrew the IRA money and deposited into his own financial account the money may have lost its exempt status because the IRA was converted into a normal bank account in the client’s own name. The subsequent transfer to the son could at least be challenged as a fraudulent transfer. .

Whether the transfer to the son is a fraudulent transfer depends on the parties’ intent. The client would argue that the intent clearly was to give the son exempt money from the IRA as a gift. A bankruptcy trustee might argue that the transfer was to the son, not as a gift, but to the son as a nominee or alter-ego of the debtor because the son was going to use the money to by a house for the debtor’s exclusive personal use. The money would be non-exempt at least until the new homestead was purchased and occupied. Like most fraudulent transfer issues, this situation depends on the particular facts and the testimony of the participants. This plan could have worked without challenge with more careful asset protection planning.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida