Julie Neubauer Obtains a Favorable Ruling Before the Illinois Appellate Court in Case Regarding an Inherited IRA

10.07.15

In a case of first impression in Illinois, on September 14, 2015, Julie A. Neubauer obtained a favorable ruling before the Illinois Appellate Court for the firm’s client, Georgia Xenakis Branit (Georgia). Georgia appealed a Cook County Circuit Court decision that discharged third-party citations to discover assets issued to collect on three separate judgments against her ex-husband, Jeffry Carl Branit (Jeffry). The issue before the Court was whether an inherited or beneficiary Individual Retirement Account (inherited IRA) is excluded from the exemptions from judgment enforcement available under Section 12-1006 of the Illinois Code of Civil Procedure [735 ILCS 5/12-1006].

Background

When Georgia and Jeffry were divorced in June 1987, their marital settlement agreement required that both Georgia and Jeffry Branit contribute to their daughter Nicole's college expenses. Nicole graduated from college in 2007. Jeffry failed to do so.

In September 2008, Georgia sought to enforce Jeffry’s contribution obligation related to Nicole's college expenses. On February 27, 2013, the trial court ordered Jeffry to contribute $110,638.00 toward his daughter's college tuition and expenses and, additionally, to pay $100,667.73 for the attorney's fees that Georgia incurred while seeking his contribution. Jeffry appealed. Thereafter, upon Georgia’s motion, the trial court also ordered him to contribute another $12,400.00 toward Georgia’s prospective legal fees on appeal. Jeffry requested review of the Judgment for interim appellate fees as well and the matters were consolidated on appeal.

Since Jeffry posted no appeal bond, Georgia attempted to enforce the judgments pending the outcome of the first appeal.[1] On March 7, 2014, while Jeffry's appeal was pending, Georgia issued three citations to discover assets to Pershing, LLC, the custodian and trustee of Jeffry's inherited IRA.

On April 9, 2014, Jeffry moved to discharge the citations, claiming that the money in his inherited IRA was exempt from collection under section 12-1006 of the Illinois Code of Civil Procedure. On April 29, 2014, the court granted Jeffry's motion to discharge the citations, upon finding that the inherited IRA fell within the plain language of the statutory exemption for retirement accounts. The federal district court decision in Clark v. Rameker 134 S. Ct. 2242 (2014) was deemed inapplicable.

Georgia appealed. While the appeal was pending, the U.S. Supreme Court ruled on its review of Clark.

On appeal, Georgia contended that the court erred in determining that Jeffry's inherited IRA was exempt from collection under section 12-1006 of the Code. She also claimed that Jeffry's inherited IRA did not qualify as an "individual retirement account" under section 408 of the Internal Revenue Code (26 U.S.C. § 408 (2006)); therefore, the funds in that account were not exempt under section 12-1006. As authority for her claim, Georgia cited the federal district court decision of In re Clark, 714 F.3d 559 (7th Cir. 2013), aff'd. sub nom. Clark v. Rameker, 134 S. Ct. 2242 (2014), a matter which arose out of a Wisconsin bankruptcy case. In re Clark, 466 B.R. 135, 139 (W.D.Wisc.2012).

Section 12-1006 of the Code, which exempts certain assets from actions to collect on a judgment, provides as follows:

"A debtor's interest in or right, whether vested or not, to the assets held in or to receive pensions, annuities, benefits, distributions, refunds of contributions, or other payments under a retirement plan is exempt from judgment, attachment, execution, distress for rent, and seizure for the satisfaction of debts if the plan (i) is intended in good faith to qualify as a retirement plan under applicable provisions of the Internal Revenue Code of 1986, as now or hereafter amended, or (ii) is a public employee pension plan  created under the Illinois Pension Code, as now or hereafter amended." 735 ILCS 5/12-1006(a) (West 2012). (emphasis added)

Georgia maintained that Jeffry's inherited IRA constituted a "retirement account" in name only and did not qualify as a "retirement plan" contemplated under section 12-1006. Georgia also argued that Jeffry's inherited IRA was not exempt from collection proceedings under section 12-1006 because it is not "intended in good faith to qualify as a retirement plan" under the Internal Revenue Code.

Georgia argued that Clark v. Rameker was controlling precedent on the issue of whether an inherited IRA should be exempt under section 12-1006. The question that the Supreme Court addressed in Clark was whether funds in an inherited IRA qualified as "retirement funds" under section 522 of the Bankruptcy Code (11 U.S.C. § 522(b)(3)(C)(2006)). Section 522 authorizes an individual debtor to exempt from the bankruptcy estate, "retirement funds to the extent those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code.”

The Supreme Court ultimately held that money in an inherited IRA does not qualify as "retirement funds" for purposes of the federal bankruptcy exemption because such funds "are not objectively set aside for the purpose of retirement." Whereas "exemptions serve the important purpose of 'protect[ing] the debtor's essential needs,'" such as providing for retirement, "nothing about the inherited IRA's legal characteristics would prevent (or even discourage) the individual from using the entire balance of the account on a vacation home or sports car immediately after her bankruptcy proceedings are complete.”

The Supreme Court’s holding relied on the differential treatment of Inherited IRAs by the tax code as compared to traditional or Roth IRAs. Specifically, "[u]nlike with a traditional or Roth IRA, an individual may withdraw funds from an inherited IRA at any time, without paying a tax penalty." In addition, the Court noted that: "[T]he owner of an inherited IRA not only may, but must, withdraw the entire balance in the account within five years of the original owner's death or take minimum distributions on an annual basis. And unlike with a traditional or Roth IRA, the owner of an inherited IRA may never make contributions to the account.”

In urging the Illinois Appellate Court to apply the rationale in Clark to her appeal, Georgia argued that "[n]o meaningful difference exists between the §522 term 'retirement funds' and the §12-1006 term 'retirement plan' “given that "[t]he operative word for both exemptions is 'retirement.'” Further, she argued that under Clark, an inherited IRA cannot be “intended in good faith to qualify as a retirement plan" just as it cannot qualify as "retirement funds" under section 522 of the Bankruptcy Code. The Illinois Appellate Court agreed.

Finding ambiguity in the Illinois statute, the Illinois Appellate Court relied on the analysis of Section 408 of the Internal Revenue Code set forth in Clark to interpret Section 12-1006. The Appellate Court found that, in Clark, the Supreme Court persuasively distinguished inherited IRAs from other IRAs that are set up for the purpose of funding one's retirement, or the retirement of one's spouse. The Appellate Court also found that Jeffry's inherited IRA was not "intended in good faith to qualify as a retirement plan under applicable provisions of the Internal Revenue Code of 1986." The federal statute expressly distinguishes an "individual retirement account" from an "[i]nherited individual retirement account." Simply put, once the original order of an IRA dies, the funds remaining in the IRA that pass on to a beneficiary no longer retain their status as retirement funds. The account no longer objectively serves a retirement purpose.

Thus, the Appellate Court concluded that Jeffry's inherited IRA was not intended in good faith to be a retirement account under the applicable provisions of the Internal Revenue Code and, since the Illinois legislature never intend to keep readily accessible funds out of the reach of judgment creditors, Jeffry's inherited IRA was not exempt under section 12-1006.

The Court reversed the order of the Circuit Court of Cook County discharging Georgia's citations to discover assets and remanded the case for reinstatement of the citations.

It is anticipated that Jeffry will Petition for Leave to Appeal to the Illinois Supreme Court.

About Julie Neubauer

Julie A. Neubauer dedicates her practice to issues of matrimonial and family law, including divorce, child custody, domestic violence/orders of protection, child support, post-judgment litigation, adoption, parentage and all other related matters. She is engaged in all aspects of the practice, including preparing prenuptial agreements, drafting pleadings, handling pre-trial motions, engaging in settlement negotiations, conducting discovery analysis, and handling trials and appeals.

Julie joined the Aronberg Goldgehn Family Law Group in July 2009, bringing a decade of experience, both from her prior career as an advocate and counselor for survivors of domestic violence and as a practicing attorney. She has been recognized as an “Emerging Lawyer” in Family Law by Leading Lawyers magazine and as a “Rising Star” in Family Law by Illinois Super Lawyers magazine.

Among her many achievements, Julie was honored by the Illinois Women’s Bar Foundation with its Public Interest Scholarship for 2006-07, an award granted to only two female law students in the state that year, and upon her graduation from law school in 2007, she received the National Association of Women Lawyers Outstanding Woman Law Graduate Award.



[1] Georgia ultimately prevailed on the first appeal. In re Marriage of Branit, 2015 IL App (1st) 132143-U appeal denied, 32 N.E.3d 674 (Ill. 2015)



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