Retirement Plans and Bankruptcy

In re Kiley, 595 B.R. 595 (Bankr. D. Utah 2018)

(a) Facts: Husband and wife were divorced in Utah. The divorce decree awarded the wife a lump-sum payment from the husband’s retirement plan and ordered that she be named as the plan’s survivor beneficiary.

The wife then declared bankruptcy. The trustee argued that the wife’s interests in the retirement plan was property of the estate, subject to division among the creditors.

(b) Issue: Was the wife’s interest in the plan part of her estate in bankruptcy?

(c) Answer to Issue: Yes as to the lump-sum payment, no as to the survivor benefits.

(d) Summary of Rationale: The wife’s survivor benefits were an interest in a retirement plan regulated by ERISA. ERISA generally prevents the assignment of regulated benefits. Thus, the wife’s survivor benefits were not part of her estate in bankruptcy.

The wife’s lump-sum award was not an interest in a retirement plan after it was paid out. Thus, ERISA’s antiassignment provision did not apply. Utah had a state law exemption for amounts received as an alternate payee, but federal law required the court to apply the exemptions as of the date on which the bankruptcy was filed. The bankruptcy was filed during the divorce case so that on the date of the bankruptcy filing, the wife was not yet an alternate payee. The wife’s lump-sum award was therefore property of the estate.

Observations:

The wife’s lump-sum award was 100% of the plan balance –the husband was substantially in arrears in support, and he gave up his interest in the plan as payment of arrears –so it is unclear what remaining value the wife’s survivor benefits would have.

2. With regard to the lump sum, did the court reach the correct result? The federal court reasoned that the wife was not an alternate payee when the bankruptcy was filed, but at that time she had rights under an ERISA-regulated retirement plan that could not be assigned to another. The wife’s payment was arguably protected at all times –before the decree as an unassignable interest in the plan and after the decree as benefits received by an alternate payee. The court’s attempt to judge retirement plan status at one point in time, and alternate payee status at another point in time, is open to question.