07 Dec NC Supreme Court Rules That Money Withdrawn From IRA Is Exempt
On November 5, 2010, the North Carolina Supreme Court issued its opinion in Kinlaw v. Harris, (2010 WL 4368438). In Kinlaw, a judgment creditor obtained a judgment against Harris for a large sum of money. The judgment creditor then issued process against Harris to pay the judgment from Harris’ assets including two Individual Retirement Accounts (IRAs). The judgment creditor argued that because Harris had taken two distributions from his IRAs over the past four years, Harris was treating the IRA accounts as a personal checking account and therefore the IRA accounts should not be considered exempt. As argued by Kinlaw,the money from the IRA accounts shouldbe paid over to Kinlaw to satisfy the judgment. Harris disagreed with this argument and contended that his IRA accounts remained exempt. Furthermore,the trial court ordered that the IRA accounts were exempt butfor any future withdrawals, defendant Harris must give notice to plaintiff Kinlaw and hold such funds in escrow until a court can determine whether such funds remain exempt.
On appeal to the North Carolina Supreme Court, the Court held that funds in a IRA account are exempt from claims of creditors under North Carolina’s exemption scheme. The Court further concluded that withdrawals from IRA accounts for which the penalty for early withdrawal is paid are also exempt though it acknowledged that multiple withdrawals from an IRA could invalidate the exempt status. But under the facts of this case,two withdrawals over four years were not so many withdrawals as to invalidate the exempt status of the IRA account.
However, the Supreme Court agreed that the the trial court did not abuse its discretion in ordering an escrow type arrangement in order to get a judicial determination of whether anyfunds withdrawn from the IRA remained exempt. Essentially, the Court said that since both parties agreed to this escrow arrangement before the trial court, it would not upset the apple cart. In future cases, it is unlikely that a defendant will agree to an escrow arrangement for future withdrawals in light of this opinion.
What does this mean to us as bankruptcy practitioners and for our clients? In most cases filed in North Carolina, we use the North Carolina exemptions. Since, we use exemptions based on North Carolina law, Kinlaw is a solid decision affirming that funds held in an IRA account or withdrawn from an IRA account are exempt. As such, a trustee may not “look back” to see if multiple withdrawals prior to a bankruptcy filing would serve to invalidate the exempt status of the IRA funds (though as stated above, the NC Supreme Court said it could happen, this writer submits the bar is set pretty high before such exemption is lost).
Practitioners such as myself often see people withdrawing money from their IRAs or other retirement accounts. They do this to stave off creditors while hoping that their personal finances will turn around without the need for filing bankruptcy. The Kinlaw decision serves as an important reaffirmation that an exemption such as money held in an IRAis not easily lost.
The Kinlaw decision serves as an important decision affirming that assets that are exempt are not subject to the claims of creditors and such exemption should carry over to the bankruptcy courts of this state. If you are facing financial difficulties, consulting with an experienced bankruptcy attorney is worthwhile so that you can know what options are available to you.
Adrian Lapas, Esq.
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