IRAs and 401(k)s Are Safe From Judgments – For Now

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In a recent decision, the South Carolina Court of Appeals considered whether post-judgment contributions to an IRA, 401(k) plan, and a College 529 Plan are exempt from execution.

Briefly, the judgment debtor confessed judgments in favor of the bank totaling approximately $113,000. When the judgments remained unpaid, the bank initiated supplemental proceedings under South Carolina Code Section 15-39-310 et seq. During the proceedings, the judgment debtor admitted to making significant contributions to his 401(k) plan, his IRA, and a 529 college savings plan in the years after he confessed judgment. The contributions exceeded $92,000. The bank argued the contributions were fraudulent conveyances and should be reversed and execution allowed on them. Because the college savings account was empty at the time of the proceedings, the master-in-equity only ruled on the propriety of the 401(k) and IRA contributions. The master concluded the IRA contributions were subject to execution and levy as fraudulent conveyances prohibited by the Statute of Elizabeth. The master found the 401(k) contributions exempt under section 15-41-30(A)(14). Both parties appealed the master’s order.

The Court of Appeals considered the IRA contributions first. Section 15-41-30(A), the statute governing homestead exemptions provides, in part, that IRA exemptions could be “reduced or eliminated by the amount of a fraudulent conveyance into the [IRA].” Reviewing the history of cases under the Statute of Elizabeth, the Court determined the Statute inapplicable. First, the Court found contributions to an IRA remained the property of the judgment debtor, so the contributions were not “gifts, grants, alienations, bargains, transfers, [or] conveyances” subject to the Statute. Second, the Court found IRA contributions are never supported by consideration, and the remaining fraudulent conveyance factors “would likely render any postjudgment contribution to an IRA fraudulent as a matter of course.” Therefore, to qualify as a fraudulent conveyance, the Court held a judgment creditor must show the judgment debtor acted with actual intent to defraud his or her creditors.

The Court then reversed the master’s finding of actual intent to defraud. In determining whether a judgment debtor acted with actual intent to defraud, the Court considered whether evidence of certain “badges of fraud” existed in the record. While the Court found several badges of fraud present, it found the limited amounts of transfers and the open nature of the transfers rebutted the presumption of fraudulent intent.

Turning to the 401(k) contributions, the Court agreed with the master, and found “[t]he plain language of [section 15-41-(30)] (14) does not provide for any exception to the exemption for 401(k) plans.” The Court found there was no fraudulent conveyance exception to 401(k) plans because the legislature did not include the fraudulent transfer language of subsection (13) in subsection (14).

It appears the IRA contributions did not exceed IRS deduction limits, so the Court of Appeals did not analyze whether contributions above the deduction limit would be a badge of fraud. Nevertheless, this opinion clarifies the rules involving “transmuting” or “converting” non-exempt property into exempt property. For the time being, South Carolina’s judgment debtors can maximize their contributions to 401(k) plans without reprisal, and maximize contributions to individual retirement accounts as long as doing so is consistent with prior years. Judgment creditors must add specific questions, interrogatories, and requests during supplemental proceedings to discover these contributions to test whether they are proper. And judgment creditors should still prepare to test the validity of any claimed exempt account.

Looming is the question all judgment creditors must be asking: how far can this opinion be stretched. Based solely upon this opinion, a judgment debtor can presumably purchase exempt property, such as jewelry, firearms, motor vehicles, even a residence, with non-exempt assets such as cash, thereby converting non-exempt assets into exempt assets. South Carolina section 15-41-30 sets the limit of most exemptions (e.g. $5,000 for motor vehicles), however, exemptions for contributions to retirement accounts are virtually unlimited.

Will the Court of Appeals reconsider the result of this opinion? Will the South Carolina Supreme Court further examine what are assuredly the detrimental effects of this opinion upon judgment creditors? Stay tuned.