Although the Supreme Court held in Clark v. Rameker, 573 U.S. 122 (2014), that an inherited individual retirement account is not exempt, the inheritance of survivor’s benefits under a pension plan can be excluded from a debtor’s bankrupt estate, for reasons explained by Bankruptcy Judge David T. Thuma of Albuquerque, N.M.
In his February 10 opinion, Judge Thuma wasn’t required to decide whether the debtor’s survivor’s benefit was exempt.
The debtor’s father worked for the City of New York for three decades and was the beneficiary of a defined-benefit pension plan under the city’s retirement system. Upon retirement, the father elected to receive smaller benefits in return for survivor’s benefits for his son. When his father died in 2013, the son applied for and began receiving survivor’s benefits of about $1,100 a month.
The son filed a chapter 7 petition in 2021 and claimed that his survivor’s benefits were exempt under Section 522(b)(3)(C). He also asserted that the benefits were not estate property.
The trustee objected to the exemption claim. Judge Thuma described the trustee as arguing that the “Debtor’s inherited interest in the [pension] Plan is comparable to the inherited IRA in Clark, should not be considered a retirement fund under § 522(b)(3)(C), and therefore is not exempt.”
Judge Thuma never ruled on the exemption claim because he found that the survivor’s benefits were not taken into estate property. He focused instead on Section 541(c)(2), which provides that a “restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.” In other words, valid spendthrift trusts do not become estate property.
The word “trust” not defined in the Bankruptcy Code, Judge Thuma recited the four elements required under New York law for the validity of a trust. He found that all were present in the father’s retirement plan. In addition, he cited another provision in New York law stating that the benefits under the retirement plan were not subject to execution or garnishment.
Judge Thuma therefore held “that Debtor’s interest in the [pension] Plan comes within the § 541(c)(2) exclusion and did not become part of Debtor’s bankruptcy estate when he filed this case.” Having found that the debtor’s survivor’s benefits were not estate property, he had no reason to rule on whether the benefits were also exempt under Section 522(b)(3)(C). That section exempts certain types of retirement funds that are exempt from taxation under specified provisions in the IRS Code.
A Bigger Exclusion under Patterson v. Shumate?
Because Judge Thuma found that the father’s pension plan came from a trust, he stopped short of ruling in the debtor’s favor under the Supreme Court’s decision in Patterson v. Shumate, 504, U.S. 753 (1992).
Section 541(c)(2) excludes property from the bankrupt estate if it is subject to a “restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law . . . .” [Emphasis added.] Note that the section refers only to a trust and not to a pension plan.
Judge Thuma quoted the unanimous Court in Patterson for saying that “[t]he natural reading of [Section 541(c)(2)] entitles a debtor to exclude from property of the estate any interest in a plan or trust that contains a transfer restriction enforceable under any relevant nonbankruptcy law.” Id. at 578. [Emphasis added.]
Given the Court’s reference to “a plan or trust,” Judge Thuma said that “some courts have held that Patterson expanded the definition of trust beyond a literal reading or, at least, focused on the substance of the legal arrangement rather than its label.” He cited the Third Circuit for saying that Patterson’s language “could be interpreted to mean that § 541(c)(2) is not limited to literal trusts or trusts formed explicitly.” In re Laher, 496 F.3d 279, 287 (3d Cir. 2007).
Because Judge Thuma found that the father’s pension plan came from a trust under New York law, he had no need to decide whether Patterson would have allowed him to employ a more expansive definition of “trust.
Although the Supreme Court held in Clark v. Rameker, 573 U.S. 122 (2014), that an inherited individual retirement account is not exempt, the inheritance of survivor’s benefits under a pension plan can be excluded from a debtor’s bankrupt estate, for reasons explained by Bankruptcy Judge David T. Thuma of Albuquerque, N.M.
In his February 10 opinion, Judge Thuma wasn’t required to decide whether the debtor’s survivor’s benefit was exempt.