Find out what's going on in the world of investing. Regular posts by the Entrust experts. Visit now...
Get the latest from Entrust emailed right to you. Sign up now...
4/27/00
(In re Savage, Bankr. E.D. Ark., No. 99-40480S, 4/27/00).
The trustee in the Chapter 7 case of Sidney and Sylvia Savage objected to exemptions filed March 25, 1999. The debtors filed their joint Chapter 7 petition on Feb. 1, 1999, and elected the federal exemptions under Bankruptcy Code Sections 522(d) and 522(a), claiming as exempt all of the funds in their three individual retirement accounts. Mrs. Savage has two IRAs held by Merrill Lynch valued at $156,000 on the schedules and at $173,000 at the time of trial.
Mr. Savage has a 401(k) retirement ERISA Qualified Plan valued at $77,000. The trustee objected to Mrs. Savage's claim of exemption in her IRAs but did not dispute the exemption claims in Mr. Savage's 401(k) retirement plan.
The debtors asserted that all the funds in the two IRAs, as well as the 401(k), are exempt because they will be reasonably necessary for their support under Section 522(d)(10)(E). The debtors previously operated a small farming operation, raising shiitake mushrooms. Currently, they raise rabbits and hope that the business will generate income above the break-even point.
Mr. Savage, age 59, is also a minister, earning $475 per month in addition to the farm income. Mr. Savage will be entitled to $680 in Social Security benefits but Mrs. Savage will receive no separate Social Security benefits. Although Mrs. Savage, age 56, formerly was a library technician, she does not currently work outside the home or farm, having recently had back surgery, according to the court.
The debtors do not live extravagantly and their current income is just sufficient to meet their needs, the court said. Although they claim their home and acreage exempt as their homestead, they cannot currently make the $500-per-month payment and relief from stay has been granted to the mortgagee holder to proceed with foreclosure. The schedules reveal no equity in the property. They have $126,000 in unsecured debt and have exempted every asset they own, the total value of which is approximately $250,000, the vast majority of which is in the retirement accounts, according to the court.
Mrs. Savage's IRA retirement accounts were derived from a $45,000 retirement plan through Tyler Junior College and $65,000 that she rolled over from her former husband's 401(k) plan. The debtors urge that since the sources of the funds from Mrs. Savage's accounts originally were exempt before the rollover, the funds should retain their exempt status.
Section 522(d), which permits a debtor to exempt the "right to receive" a payment under a pension plan to the extent reasonably necessary for the support of the debtor, does not contain a tracing provision, Judge Mary Davies Scott said. Rather, it exempts only the right to receive a payment.
In contrast, section 522(d)(11) expressly permits the debtor to exempt a "right to receive, or property that is traceable to" particular items, including crime victim awards, life insurance proceeds, wrongful death awards, awards for personal bodily injury, and compensation for loss of future earnings.
"When Congress includes particular language in one section of a statute but omits it in another section of the same act, as a matter of statutory construction, the courts presume that Congress acted intentionally and purposely in the disparate inclusion or exclusion," the judge said.
"Thus, it appears that Congress intended to prohibit tracing as to the property interests described in section 522(d)(1), including the right to receive a payment under a pension plan," Scott said. "Since the tracing language was omitted, this Court may not apply the statute so as to permit tracing as urged by the debtors."
The court said even if the property was exempt in the first place, it lost that status when it was rolled over into the Merrill Lynch IRA accounts. The trustee is entitled, unless the funds will be reasonably necessary for the debtors' support, to reach those assets for the benefit of the debtors'unsecured creditors, the court determined.
Although the funds in Mrs. Savage's IRA accounts do not have the protections ordinarily afforded ERISA Qualified Plans, Section 522(d)(10)(E) provides for an exemption in "a payment under a stock bonus, pension, profit sharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor," the court noted.
'Reasonably Necessary' Funds?
Scott said the issue is whether the funds in Mrs. Savage's IRA will be reasonably necessary for the debtors' support. There are a number of factors the courts use to make this determination, she said, including:
Scott said that after reviewing the case authority and comparing the facts in those cases with the debtors' situation, she found that the debtors should be allowed to retain the larger of Mrs. Savage's two IRA's.
"As a general rule, the bankruptcy courts have found an Individual Retirement Account reasonably necessary for the debtors' support if their income is minimal and their age does not allow time to fund a new retirement plan, "the court said.
"While the Court does not believe that all three retirement accounts are necessary for the debtors' support, Mr. Savage's single retirement account will not be sufficient to fund their retirement," the court said.
The court noted that the debtors would like to retire in a few years and given their life expectancies at their current ages of 56 and 59, found that they will not be able to work a sufficient number of years to fund a new retirement plan.
The court also said the debtors both have medical conditions that hamper their ability to conduct particular tasks and clearly impact upon their ability to find outside employment. Mr. Savage suffers from a condition that precludes him from working for extensive periods of time in high heat, and Mrs. Savage's back problems preclude her from working in her field and limit her ability to find work that does not require periods of standing.
Although they currently have a new, small rabbit farm, the business is in serious jeopardy because it is located on the property that is now subject to foreclosure. Indeed, although they would like to work things out with the mortgagee, the debtors anticipate there will be a deficiency after foreclosure and sale of the land and home is inevitable, the court said.
With the loss of the land and home, the debtors have only Mr. Savage's current meager income from his ministry, which is unlikely to provide additional funds for their retirement. Although Mr. Savage will eventually have his 401(k) retirement and Social Security, Mrs. Savage will not receive any separate Social Security benefits, the court noted. Although there are a few assets that could be liquidated, these are not of great value and certainly are insufficient to fund a retirement, the court said.
"Under the facts of this case, the debtors do not have sufficient time and the wherewithal to replenish the retirement accounts which would provide funds reasonably necessary for their future support," the court determined.
Accordingly, the court sustained the trustee's objection to the smaller of Mrs. Savage's Merrill Lynch accounts and overruled it as to the larger of Mrs. Savage's Merrill Lynch accounts.
Remember that while Entrust provides excellent educational resources, we do not endorse or sell any investment products. The Entrust Group respects your privacy. Please read our Privacy Statement.
Attend seminars, workshops and classes on self-directed IRAs in your area.
site design, development & e-marketing by 
FUZE
