In “IRAs and 401(k)s Are Safe From Judgments – For Now”, Nexsen Pruet, discusses a recent decision, in which 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.
The article begins as follows:
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.
Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.