July 22, 2019

Archives for June 23, 2014

Inherited IRAs in Light of the U.S. Supreme Court’s Decision in Clark v. Rameker

This post originally appeared on Barbara Cashman’s Denver Elder Law blog on June 18, 2014.

CashmanBy Barbara Cashman

Everyone knows what an IRA is – right?  We think IRAs have been around a really long time, but they only came into being in 1975 with ERISA legislation, and Roth IRAs came in 1997. IRAs are classic nonprobate property that someone can pass to others without probate in many circumstances.

Q: What happens if I complete the beneficiary designation form?

A: Your beneficiaries will have much more flexibility and protections (especially on the tax front).

Q: What happens if I don’t bother with the beneficiary form?

A: Well, you won’t be around to find out – right?!  Here’s a link to a Colorado Business Magazine article about the importance of designating a beneficiary to maintain that flexibility.

Some handy IRA vocabulary words:

  • RBD – required beginning date (701/2 years of age), after which you are required to withdraw the
  • RMD – required minimum distribution, an annual distribution.

Here it is important to consider whether the decedent died after his or her RBD.  If she or he was already receiving RMDs, you will want to determine whether the distribution for that final year needs to be paid. Be sure to check with the account custodians to determine if the distribution was made before the date of death.  There are two basic types of IRAs that can be passed along to survivors:

  1. Spousal IRA 
    This is generally the simplest to accomplish and a spouse will want to consider among several choices –  to roll them over into an IRA, start receiving benefits, have them paid out in a lump sum, or disclaim some portion to minimize estate taxes in the spouse’s estate.
  2. Inherited IRA
    There is an important distinction initially regarding whether the beneficiary designation was made out to the beneficiaries or left blank. . .  There is generally much more flexibility when the designations are completed.

So here’s a question . . . . Whether inherited IRAs are generally exempt from creditors depends on where you live! Are these funds still qualified and exempt, or are they just another inherited asset?

In an inherited IRA scenario, a beneficiary (often an adult child) will need to take out the RMD in the parent’s IRA every year and declare that as income. In addition, the IRA cannot be added to by the inheritor. You might be wondering what types of protections are afforded inherited IRAs from the creditors of the inheritor. Well, I can say with all lawyerlike confidence . . .  it depends. Under Colorado law, specifically Colo. Rev. Stat. § 13-54-102(1)(s), there is an exemption from judgment creditors for certain types of retirement accounts and benefits. The definition includes IRAs “as defined under Section 408 of the Code” (this would be 26 U.S.C. § 408(d)(3)(C)(ii)). Under the Bankruptcy Abuse Preventive and Consumer Protection Act of 2005 (BAPCPA), many states opted out of the federal bankruptcy exemptions in favor of state law exemptions. Read more on this topic here from my learned colleague Laurie Hunter.

It is important to consider that there are at least three different layers to the inherited IRA treatment: federal tax law, state law relating to bankruptcy and what creditors can collect, and bankruptcy. Until just a few days ago, when the U.S. Supreme Court ruled on a writ of certiorari on the U.S. Court of Appeals for the Seventh Circuit’s 2013 decision, In re Clark, there was a split among the federal circuit courts of appeal – you can read more about it here.

The Federal Circuit Courts of Appeal Were Split Over the Meaning of the Phrase “Retirement Funds”

Two federal courts of appeal – the Fifth and Seventh Circuits (whose decisions were binding in the regions that they cover – Colorado is part of the Tenth Circuit) had come to opposite conclusions while interpreting the meaning of the same term. In 2013, the Fifth Circuit decided that the phrase “retirement funds” in the bankruptcy exemption statute quoted above means any funds “set apart” in anticipation of “withdrawal from office, active service, or business” and that the statute does not limit “retirement funds” solely to funds of the bankrupt debtor, so long as the funds were originally “set apart” for someone’s retirement. In re Chilton, 674 F.3d 486 (5th Cir. 2012). Once the funds were set apart for retirement, they maintained that same character for bankruptcy exemption purposes. The court thereby permitted the debtor in Chilton to exempt all of a $170,000 IRA inherited from her mother.

In Clark, the Seventh Circuit expressly disagreed with the Fifth Circuit, adding that it “do[es] not think the question is close.” The Seventh Circuit observed that, while inherited IRAs do shelter money from taxes until it is withdrawn, they lack many of the other attributes of an IRA. That court noted in particular that the beneficiary of an inherited IRA is prohibited from rolling those funds over into his or her own IRA and from adding her own funds to the inherited IRA. The beneficiary must take distributions from the inherited IRA within a year of the original owner’s death and complete those payouts over a defined period, often as little as five years, regardless of the beneficiary’s age and employment status. In short, once the original owned died, “the money in the inherited IRA did not represent anyone’s retirement funds.” That court of appeals declined to extend the character of a decedent’s retirement funds into the inheritance context and therefore decedent’s daughter could not then use that money as her own retirement savings, and it became no different from an inherited certificate of deposit or money market account: non-exempt and available to distribute to the daughter’s creditors.  That was the essence of the split in the circuits.

Just a few days ago, the U.S. Supreme Court ruled unanimously in Clark v. Rameker that inherited IRAs are not protected in bankruptcy. Here’s a link to the SCOTUSblog coverage of the decision. The US Supreme Court followed the line of reasoning of the bankruptcy court and the Seventh Circuit, disallowing the attempt by petitioner in bankruptcy court, Hedi Heffron-Clark, to exclude the funds in the IRA from the bankruptcy estate using the “retirement funds” exemption under Section 522 of the Bankruptcy Code, which exempts tax-exempt retirement funds from a bankruptcy estate. Just in case you are an insomniac and want to read the entire decision, rendered June 12, 2014, here it is in pdf format.

I still think that, notwithstanding the U.S. Supreme Court’s ruling, inherited IRAs are  an important legacy for a parent to leave an adult child, and it is important to not underestimate the “emotional” value of the money from a deceased parent’s retirement savings for the use of a child’s retirement. But beware, they won’t be protected from an adult child’s creditors in a bankruptcy proceeding. So please remember that an IRA and an inherited IRA are not really the same animal!

Barbara Cashman is a solo practitioner in Denver, focusing on elder law, estate law, and mediation. She is active in the Trust & Estate and Elder Law sections of the CBA and is the incoming chair of the Solo/Small Firm section. She contributes to the SOLOinCOLO blog and blogs weekly on her law firm blog, where this post originally appeared. She can be contacted at barb@DenverElderLaw.org.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

Hon. Victor Reyes to Retire from Tenth Judicial District Court Bench

On Monday, June 23, 2014, the Colorado State Judicial Branch announced the retirement of Hon. Victor Reyes of the Tenth Judicial District Court in Pueblo County, effective December 31, 2014.

Judge Reyes was appointed to the district court in 1998, where his docket includes domestic, juvenile, criminal, civil, and probate matters. Prior to his appointment, he was a public defender for 14 years. He also is on the faculty of the National Judicial Institute on Domestic Violence sponsored by the National Council of Juvenile and Family Court Judges. He received his undergraduate degree from Emory University and his J.D. from Georgetown University.

Applications are being accepted for the vacancy. Eligible applicants must be qualified electors of the Tenth Judicial District and must have been admitted to practice law in Colorado for five years. Application forms are available on the State Judicial website, and are also available from the ex officio chair of the nominating, Justice William Hood. An original signed application and an identical PDF must be filed with the ex officio chair no later than 4 p.m. on July 29, 2014. Anyone wishing to nominate another person must do so no later than 4 p.m. on July 22.

For more information on the vacancy, and for contact information for the nominating commission members, click here.

Tenth Circuit: County Violated Title VII by Terminating Employee After He Helped Colleague Pursue Sexual Harassment Claim Against Employer

The Tenth Circuit Court of Appeals issued its opinion in Barrett v. Salt Lake County on Friday, June 13, 2014.

Michael Barrett was employed by Salt Lake County for 14 years, where he received promotions and favorable reviews until he helped a colleague pursue a sexual harassment claim against her boss. After he assisted his colleague, he was demoted by the county. He sued, alleging the county violated Title VII by retaliating against him, and the jury found for Mr. Barrett.

The county appealed, asserting that it was entitled to judgment as a matter of law. The Tenth Circuit disagreed, noting that the case on which the county relied play no role in post-trial motions. The county also alleged that the jury instructions provided the wrong procedural framework for determining Title VII cases. However, the jury received instruction on the proper procedural framework and decided the case accordingly, so the county’s argument failed. The county also objected to another jury instruction, but this objection was not properly preserved at trial.

The county also disagreed with the district court’s award, not restoring Barrett to his former position since the position had been filled but instead restoring him to his prior level of pay. The county claimed that the result afforded Barrett a “windfall” for performing less work for more pay. However, the Tenth Circuit was unsympathetic to this argument, noting that the district court retains wide discretion in determining equitable relief.

The final argument raised by the county was that the district court’s award of attorney fees to Barrett for fees incurred during the internal grievance process was in error because it was an optional process, not a mandatory exhaustion of administrative remedies. On that limited point, the Tenth Circuit agreed. The Tenth Circuit remanded for redetermination of attorney fees and affirmed on all other points.

Tenth Circuit: Defendant Must Show that a Reasonable Person Would Withdraw Guilty Plea to Establish Ineffective Assistance

The Tenth Circuit Court of Appeals issued its opinion in Bonney v. Wilson on Friday, June 13, 2014.

Defendant Steven Bonney was accused of sexual assault by five members of his extended family – four girls and one boy – when Bonney was a teenager and the victims were between the ages of six and eight years old. The State of Wyoming charged him with four counts of second degree sexual assault, two of which involved female victim T.N., and one count of third degree sexual assault, which, along with the other two second-degree counts, involved female victim V.B. No charges were filed as to the other three victims. Pursuant to a plea agreement, Bonney pled guilty to two counts of second degree sexual assault – one involving each of the charged victims. As part of the plea agreement, the State agreed to dismiss the remaining charges, forego filing similar charges regarding P.M. (the lone male victim), and recommend that Colorado authorities not charge Bonney with crimes committed in that state against victim K.B. At sentencing, a fifth victim, K.S., filed a victim impact statement that discussed how the abuse had divided the family. Charges were never filed regarding K.S.

After the plea agreement entered but before the time for withdrawal of the guilty plea had passed, Bonney’s defense counsel received a letter from K.S., which said that she had not had sexual contact with Bonney but he had “put his fingers in places that no cousin should have.” K.S. also said that T.N. had fabricated her story and encouraged K.S. to embellish her story. Defense counsel never informed Bonney of the letter and the time passed for withdrawing the guilty plea. About a month later, Bonney retained new counsel and filed a state petition for post-conviction relief on ineffective assistance of counsel grounds. The sentencing court granted Bonney an evidentiary hearing on that claim (and two others not at issue in the Tenth Circuit), and admitted K.S.’s affidavit into evidence. K.S. also testified, giving specific information regarding the inappropriate contact Bonney had had with her and stating that T.N. had never told her she was untruthful. Defense counsel testified that he did not believe K.S.’s letter could do anything but harm his client, since it established another charge of sexual misconduct with a minor and the defense would have to acknowledge K.S.’s description of the defendant’s inappropriate touching in order to use her testimony against T.N.

The Wyoming court issued a written order denying Bonney’s claims, noting that to show ineffective assistance, Bonney would have had to show that his counsel’s performance fell below an objective standard of reasonableness and prejudiced his defense. Additionally, the court stated that “Petitioner must do more than argue that he would have insisted on going to trial—he must demonstrate that a reasonable person would have done so.” The Wyoming court concluded that although defense counsel should have apprised his client of the letter, there was no prejudice, because a reasonable person in defendant’s position would still have filed the guilty plea. Bonney timely appealed the Wyoming court’s decision to the federal district court, which granted Bonney a conditional writ of certiorari on the state court record and instructed the Wyoming court to permit Bonney to directly appeal his convictions.

On appeal, the Tenth Circuit reversed the judgment of the federal district court, opining that the district court jumped beyond the state court’s analysis of whether it would have permitted Bonney to withdraw his guilty plea and instead focused on Bonney’s right to appeal his convictions. Applying U.S. Supreme Court precedent, the Tenth Circuit ruled that a state court’s determination that a claim lacks merit precludes federal habeas relief so long as a fairminded jurist might agree that such determination was not inconsistent with Supreme Court precedent. Because Bonney could not have used his best defense if he had admitted the K.S. letter — that he was completely innocent of all charges and they were simply fabrications of the victims — he would have been significantly prejudiced by withdrawing his guilty plea. Additionally, the state would have charged him with more counts regarding victim P.M. if not for the plea agreement, thus prejudicing defendant further. The Tenth Circuit determined that a rational defendant in Bonney’s position would not have withdrawn his guilty plea after K.S.’s partial recantation, and reversed the judgment of the federal district court.

Tenth Circuit: Unpublished Opinions, 6/23/2014

On Monday, June 23, 2014, the Tenth Circuit Court of Appeals issued one published opinion and one unpublished opinion.

United States v. Thody

Case summaries are not provided for unpublished opinions. However, published opinions are summarized and provided by Legal Connection.

Colorado Supreme Court: Announcement Sheet, 6/23/2014

On Monday, June 23, 2014, the Colorado Supreme Court issued four published opinions.

People v. Kailey

In re: Colorado Medical Board v. Office of Administrative Courts

In the Matter of the Title, Ballot Title, and Submission Clause for 2013-2014 #76

In the Matter of the Title, Ballot Title, and Submission Clause for 2013–2014 #129

Summaries of these cases are forthcoming, courtesy of The Colorado Lawyer.

Neither State Judicial nor the Colorado Bar Association provides case summaries for unpublished appellate opinions. The case announcement sheet is available here.

Colorado Court of Appeals: Error to Allow Jury Unfettered Access to Videotaped Interview of Child Sexual Assault Victim

The Colorado Court of Appeals issued its opinion in People v. Jefferson on Thursday, June 19, 2014.

Sexual Assault on a Child by one in a Position of Trust—Videotape—Evidence—Jury Deliberations.

Defendant was a friend of L.T., a mother of two small children. In 2008 and 2009, he watched the children four times, including two overnights, without their mother being present. On one of the overnights, he allegedly sexually assaulted J.B., L.T.’s 5-year-old daughter. A jury found defendant guilty of sexual assault on a child and sexual assault on a child by one in position of trust.

On appeal, defendant contended that the trial court abused its discretion when it gave the jury during deliberations unrestricted and unsupervised access to the videotaped forensic interview of J.B. The trial court admitted the videotaped interview as child hearsay under CRS § 13-25-129. However, the trial court abused its discretion in allowing the jury unfettered access to the statements during deliberations. During her live testimony during trial, almost two years after the alleged assaults, J.B. was unable to remember many details about what had happened between her and defendant. Thus, J.B.’s credibility was the main issue at trial, and the video, which was taken a day after J.B. first reported the assaults to her mother, filled in the gaps of her testimony. Furthermore, the court gave no limiting instruction regarding the jury’s use of the video. These errors created grave doubt as to the error’s effect on the verdict or the fairness of the trial proceedings. Therefore, defendant’s convictions were reversed and the case was remanded for a new trial.

Summary and full case available here.

Colorado Court of Appeals: Rioting Not Lesser Included Offense of Rioting in Detention Facility

The Colorado Court of Appeals issued its opinion in People v. Lacallo on Thursday, June 19, 2014.

Public Disturbance—Riot—Detention Facility—Lesser Included Offense—Crime of Violence—Sentence.

Defendant and other inmates refused to leave a common area of the Jefferson County jail and lockdown. Before being returned to their cells, they damaged the common area. During the disruption, visiting members of the public were evacuated from the jail.

On appeal, defendant asserted that the prosecution failed to prove a “public disturbance” under CRS § 18-9-101(2), because a detention facility is not a place open to the public. Defendant failed to preserve this argument in the trial court, so the Court of Appeals reviewed this challenge for plain error. No Colorado case has interpreted the phrase “public disturbance” under CRS § 18-9-101(2), and there are no Colorado cases that provide a commonly accepted definition for the term “public” that would have alerted the trial court to alleged error arising from defendant’s interpretation. Thus, because determining the meaning of “public disturbance” under existing Colorado authority would be difficult, “the alleged error cannot be regarded as plain or obvious.”

Alternatively, defendant contended that even if sufficient evidence supported his conviction for engaging in a riot, because it is a lesser included offense of rioting in a detention center, the convictions should merge. However, each of these two offenses requires proof of one element that the other does not. Under CRS § 18-8-211(1), the offender must have been confined in a detention facility. Under CRS § 18-9-104(1), the offender—who need not have been confined—must have caused a public disturbance. Thus, engaging in a riot is not a lesser included offense of rioting in a detention facility.

The Attorney General conceded defendant’s contention that the trial court erred by applying crime of violence for sentencing to his conviction for engaging in a riot. The trial court imposed a consecutive six-year sentence for engaging in a riot, after the prosecution told the court that this offense was a crime of violence. However, CRS § 18-9-104(1) does not define engaging in a riot as a crime of violence. Because neither an increased sentencing range nor a consecutive sentence was mandated, defendant’s entire sentence was vacated and the case was remanded for resentencing.

Summary and full case available here.

Colorado Court of Appeals: No Authority Permits Counterclaims or Cross-Claims in Spurious Lien Action

The Colorado Court of Appeals issued its opinion in Fiscus v. Liberty Mortgage Corp. on Thursday, June 19, 2014.

Spurious Lien—Deed of Trust—Forgery—Statute of Limitations—Counterclaims—Cross-Claims—Ownership Interest.

Raymond L. Fiscus (owner) sued Liberty Mortgage Corporation, BB&T Corporation, and Branch Banking and Trust Company (collectively, the banks) under the spurious lien statute, seeking to have a deed of trust recorded by Branch Banking and Trust in 2009 declared spurious after owner’s wife executed the deed of trust on owner’s behalf based on a forged power of attorney. The banks counterclaimed against owner, asking to judicially foreclose on the property, alleging unjust enrichment and seeking an equitable lien against the property. The banks also filed a third-party complaint against wife, alleging theft. The trial court declared the deed of trust spurious and ordered its release, and dismissed the bank’s counterclaims and third-party claims.

On appeal, the banks contended that the trial court erred when it held that owner’s spurious lien petition was not barred by the statute of limitations. Spurious lien actions must be brought within two years of accrual. A cause of action accrues on the date “both the injury and its cause are known or should have been known by the exercise of reasonable diligence.” Here, the trial court concluded that, had owner exercised reasonable diligence, April 2010 was the earliest date he could or should have discovered the existence of the deed of trust. Therefore, owner timely filed the spurious lien petition on March 29, 2012.

The banks contend that the trial court erred when it granted owner’s motion to strike their counterclaims for judicial foreclosure, unjust enrichment, and an equitable lien, as well as their third-party claim against wife. However, there is no authority permitting counterclaims or cross-claims to be brought in a spurious lien action. Therefore, the trial court did not err when it dismissed these claims without prejudice. Because these claims were dismissed without prejudice and the banks were not prohibited from bringing a separate action regarding their claims, the banks were not deprived of any due process rights to pursue them.

The banks also argued that the trial court erred when it concluded wife did not have an ownership interest in the property sufficient to allow her to encumber the property. However, wife was not the record owner of the property. Therefore, she had an inchoate interest only and did not have the authority to encumber the property.

Summary and full case available here.

Tenth Circuit: Unpublished Opinions, 6/20/2014

On Friday, June 20, 2014, the Tenth Circuit Court of Appeals issued one published opinion and two unpublished opinions.

United States v. Achana-Suaso

Glacier Construction Co. v. Travelers Property Casualty Co. of America

Case summaries are not provided for unpublished opinions. However, published opinions are summarized and provided by Legal Connection.