The Robertson case: a beneficiary by any other name is still a beneficiary.

• Author: Lynch, Kristen M.
• Position: Real Property, Proabte and Trust Law

When does the term "beneficiary" not mean "beneficiary"? In the recent case of Robertson v. Deeb, 16 So. 3d 936 (Fla. 2d DCA 2009), the court determined that an interest of a beneficiary of an inherited individual retirement account (IRA) was not an exempt asset protected from creditors under the terms of F.S. ([section]) 222.21, even though the statute has, by its terms, protected the interests of a "beneficiary" in an IRA since it was originally enacted in 1987. The authors respectfully disagree with the decision in this case. As Robertson is a case of first impression in Florida, the authors believe it addresses an issue of great importance, potentially affecting thousands of nonspouse beneficiaries of IRAs and other types of tax-qualified plans or accounts in Florida.

The Name of the IRA Game

IRAs are a form of a retirement account established in accordance with I.R.C. ([section]) 408 or ([section]) 408A. Although IRAs and other types of qualified or tax-deferred plans are creatures of the Code, state laws may impact these accounts. Examples of state laws that could impact retirement accounts are guardianship and intestacy laws, principal and income act provisions, elective share statutes, trust statutes, real estate statutes, and bankruptcy exemption statutes, such as those relied upon in the Robertson case. Every state has a different statutory scheme, and the decision as to which state's law applies depends on the issue at hand and whether the issue is based upon the domicile of the IRA owner, the IRA beneficiary, or the state law specified in the IRA agreement.

Qualified plans and IRAs present an estate and asset protection planning challenge because they cannot (except in the case of divorce) be transferred from the IRA owner to anyone else during lifetime without losing tax-deferred status. The primary goal of most clients is to preserve and maximize the tax-deferred growth opportunities provided by these types of accounts. In fact, many clients choose to leave this type of asset to children or grandchildren for the enhanced income tax-deferral opportunities. This appears to be one of the reasons that the Pension Protection Act of 2006 includes provisions for nonspouse beneficiaries of qualified plans to roll those assets into "inherited" IRAs after the death of the plan participant. (1) However, under federal bankruptcy law, assets that a beneficiary elects to leave in a qualified plan would be protected from the beneficiary's creditors, whereas the protected status of those assets transferred into an "inherited" IRA in Florida has now been called into question.

The Robertson Case

In Robertson, Kevin J. Deeb sued Richard A. Robertson on a promissory note. Deeb obtained a judgment of $188,000 against Robertson and served a writ of garnishment against RBC Wealth Management (RBC), the custodian of an IRA that Robertson had inherited from his father, Harold Robertson.

Under federal law, if an IRA owner dies and has named a beneficiary of the IRA who is either an individual or a trust that meets certain requirements, then the beneficiary of that IRA is allowed, under federal law, to transfer the IRA from the name of the deceased IRA owner into an IRA titled in the decedent's name as owner (deceased) for benefit of the beneficiary. This is commonly referred to as an "inherited IRA." The advantage of creating an inherited IRA is that, if done properly, the Code allows the required minimum distributions from the IRA to be spread out over the life expectancy of the beneficiary, as opposed to that of a presumably older IRA owner, and no premature distribution penalties are assessed against the beneficiary, regardless of his or her age. (2) This is true whether the beneficiary is a spouse or a nonspouse, unless the spouse rolls it into their own name, at which point the spouse becomes the owner.

In Robertson, RBC, the custodian of the IRA, informed Robertson that he had two options with respect to the distribution of his father's IRA. The first option was to transfer his father's IRA into an "inherited IRA," which would require that he take minimum distributions (3) based on Robertson's remaining life expectancy, with the ability to withdraw more than the minimum distributions without a penalty. The second option was to keep the IRA in his father's titled account and take distributions over five years without penalty. (4) Robertson chose the first option. The funds were transferred from his father's IRA into an inherited IRA, properly titled "Richard Robertson, Beneficiary, Harold Robertson, Decedent RBC Capital Markets, Custodial IRA."

The issue before the Second District Court of Appeal was whether Robertson's interest in the inherited IRA was exempt from garnishment. The lower court had held that it was not exempt because the "account became Robertson's property and no longer qualified for the same exemptions from taxation." (5) Further...