An IRA owner could not rely on a Florida exemption to shield his IRA account from creditors after engaging in prohibited acts of self-dealing with his IRA funds, the Eleventh Circuit held in Yerian v. Webber, 2019 WL 2610751 (11th Cir. June 26, 2019). The IRA owner, Keith Yerian, opened a self-directed IRA. The IRA was governed by two contracts. One of the contracts required Yerian to refrain from engaging in prohibited acts, which included using IRA income or assets for his own interest or transferring IRA income or assets to himself or his spouse. Under § 408 of the federal tax code, an IRA loses tax-exempt status when the owner engages in self-dealing. Nevertheless, Yerian went on a spending spree with IRA funds, buying a condominium for personal use, taking title to two cars, and driving one of the cars as a personal vehicle. Yerian admitted that he engaged in self-dealing transactions that were expressly prohibited by the IRA agreement and the federal tax code.
Yerian filed for Chapter 7 bankruptcy and claimed the IRA as exempt under section 222.21(2)(a)(2) of the Florida Statutes. That statute provides that a debtor may exempt from bankruptcy administration any money in “a fund or account” that is “[m]aintained in accordance with a plan or governing instrument that has been determined . . . to be exempt from taxation under . . . [§ 408 of the Internal Revenue Code] . . . , unless it has been subsequently determined that the plan or governing instrument is not exempt from taxation in a proceeding that has become final and nonappealable.” Yerian argued that even though he had operated the IRA in violation of the federal tax code, this statute protected the IRA from the reach of creditors so long as the IRA’s governing instrument satisfied the requirements of section 408.
In an opinion authored by Judge Britt Grant, the court rejected Yerian’s argument, affirming the judgments of the bankruptcy and district courts. This was the first time the Eleventh Circuit interpreted the language of section 222.21(2)(a)(2) at issue in this case. The court explained that the statute permits a debtor to claim an exemption if three requirements are met. “Yerian’s claim for exemption turn[ed] on whether the second requirement [was] satisfied—that is, whether his IRA was ‘maintained in accordance with’ the ‘plan or governing instrument’ that the IRS had determined was exempt from taxation under § 408’s requirements.” The court clarified that for the Florida exemption to apply, the IRA must be “maintained in accordance with its own governing instrument,” not in accordance with § 408 of the federal tax code, as the bankruptcy and district courts had interpreted.
Based on the facts and Yerian’s admissions, it was plain that Yerian’s self-dealing violated the express terms of the governing instrument and therefore that Yerian failed to maintain his IRA in accordance with its governing instrument. Thus, Yerian could not claim the IRA as exempt property under section 222.21(2)(a)(2).
The court rejected Yerian’s argument that section 222.21(2)(a)(2) only required that he establish his IRA in accordance with a proper governing instrument. The court emphasized that the statute required the IRA to be maintained in accordance with the governing instrument. So to determine whether an exemption can be claimed, a court must look beyond whether the IRA was properly established and look at how the IRA has been operated over time. Later infractions can disqualify the debtor from claiming the exemption.
As a final note, the court rejected the Trustee’s argument that it would be absurd for Florida law to shield IRAs operated in violation of federal tax law, stating, “Congress has specifically authorized states to craft their own creditor exemptions—which may be as generous or as austere as the state deems appropriate.”