By: David J. Lynam, Principal, Lynam and Associates

Published by the Illinois CPA Society’s Practice Advantage September 26, 2014

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The United States Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“the Act”), signed into law by President G.W. Bush, drastically altered the debtor/creditor landscape. It also explicitly extended the bankruptcy protection afforded to qualified retirement plans (401k, 403b) to Individual Retirement Accounts (“IRAs”) up to $1 million, inflation adjusted. (Bankruptcy Code Section 522 (b)). Left to be determined by the changes wrought by the Act was the exemption status of “inherited IRAs,” which are either traditional or Roth IRAs held by inheritors following the death of the IRA owner. There are two categories of IRA inheritors, or beneficiaries, each with distinct inherited IRA tax and distribution requirements- (1) the surviving spouse, and (2) any other beneficiary, including, but not limited to children, grandchildren, estates, and trusts.

On June 12, 2014, the Supreme Court, in Clark v. Rameker, 134 S.Ct. 2242 (2014), ruled in an case from the Bankruptcy Court for the Western District of Wisconsin that despite the Act’s exemption of traditional IRAs up to $1 million, inherited IRAs enjoy no special protection in bankruptcy, and are not exempt from creditor claims in a bankruptcy proceeding under federal law, as the funds they hold do not constitute “retirement funds” within the meaning of the Act. With Americans keeping an estimated $5.4 trillion of assets in IRAs, this decision has far reaching effects on the owners of IRAs. Many who have inherited these retirement benefits hold them in an inherited IRA form to stretch out the required distributions over their life expectancies. This structure is now subject to creditor claims in the event of the beneficiary’s bankruptcy, and also in non bankruptcy state law proceedings, depending on the residence of the beneficiary and that jurisdiction’s particular exemptions.

Instrumental to the Supreme Court’s decision in Clark was the interpretation of the federal bankruptcy exemption of “retirement funds”, with the Court drawing the distinction between inherited IRAs and traditional or Roth IRAs. The Court reasoned that, unlike a regular IRA owner, beneficiaries of an inherited IRA (1) cannot add money to the account, (2) must take out annual distributions under a life expectancy calculation or a fixed five year method (see Internal Revenue Code sections 72(q) (1) and 401(a) (9) (B)), and (3) have the ability to withdraw the totality of the funds at any time without being subject to the early withdrawal penalty. The Court found that these characteristics of an inherited IRA cause it to be more of a ‘pot of money’ rather than a retirement fund, and therefore held the inherited IRA not to be exempt from creditors.

Spousal beneficiaries are entitled to “roll over” or transfer their share of an inherited IRA into their own spousal IRA account. Once rolled over, the funds would not be subject to the claims of spousal creditors under bankruptcy law, based on the rationale utilized by the Supreme Court in Clark. With a spousal IRA, the spouse can make contributions to the spousal IRA, the spouse must take minimum distributions exactly in the same manner as would be true for that particular type of plan, and the 10% early withdrawal penalty applies to the funds rolled over in the event that the spouse withdraws funds before 59½. Generally, if the ability to make penalty free withdrawals for a 59 ½ or younger spouse out of an inherited IRA are trumped by asset protection concerns, this spousal rollover should be performed as soon as practicable in order to obtain the asset protection of the spousal IRA.

For non-spousal beneficiaries holding inherited IRA’s, the states in which they reside have the power to opt out of the federal exemptions listed in section 522(d) of the Bankruptcy Code and either mandate that a debtor select the state exemptions, or allow him to choose between state and federal exemptions. Several states have expressly exempted inherited IRAs from bankruptcy proceedings, although inherited IRA’s may still be subject to creditors in non-bankruptcy state court proceedings in those states.

Illinois requires bankruptcy debtors with IRAs to use state law exemptions covering “retirement plans, including an individual retirement annuity or account” 735 ILCS 5/12-1006(a). Presently, there is little authority on whether this exemption includes inherited IRAs in a bankruptcy proceeding or in non-bankruptcy proceedings under state law. Litigation is now pending in the United States Bankruptcy Court for the Northern District of Illinois (In re Taylor, No. 12-16471 (Bankr. N.D. Ill.)) where a debtor is seeking an exemption for an inherited IRA under 735 ILCS 5/12-1006(a), arguing that the plain language of the applicable Illinois exemption is broader than that of the federal exemption circumscribed by the Supreme Court in Clark.

Owners of IRAs wishing to plan for protection of the beneficiaries of their IRAs from creditors can create a so called “see through” inter vivos or testamentary trust as the IRA’s beneficiary, pursuant to Regulations Section 1.401 (a)(9)-4. If valid under state law, irrevocable at death, individual beneficiaries are identifiable from the trust instrument, and certain provisions are present prohibiting the assignment or transfer of the beneficiaries’ interests, such a trust can act to shield inherited IRA funds from creditors, and the beneficiaries of the trust will be treated as the beneficiaries of the IRA. If the trust beneficiaries are treated as beneficiaries of the IRA, the trust may be able to stretch IRA distributions out over the oldest beneficiary’s life expectancy. Certain documentation must also be timely provided to the custodian or plan administrator. Such a trust can be designed as a fully discretionary trust, thereby providing the maximum protection from creditors.

The Supreme Court’s decision in Clark v. Rameker should provide a special impetus to planning for asset protection where significant estate wealth is concentrated in IRAs.

UPDATE 10/16/14: The United States Bankruptcy Court for the Northern District of Illinois has rejected the debtor’s claim in In re Taylor, No. 12-16471, that Illinois’ inherited IRA bankruptcy exemption from creditors is broader than the federal exemption. The judge, however, provided no reasoning for his decision. Thus the issue of whether inherited IRAs are exempt from creditor collections in a bankruptcy proceeding in Illinois remains undecided until a higher court issues a ruling.

Disclaimer: This article is designed to provide information in regard to the subject matter and has been prepared with the understanding that neither the Illinois CPA Society nor the author of this article is providing accounting, tax or legal advice or is performing any legal, accounting or other professional service. If accounting, tax or legal advice or other expert assistance is required, the services of a competent professional person should be sought.


Illinois property owners and businesses need to take action to prevent the threat of concealed guns and weapons into their buildings and workplaces.

Pursuant to the Illinois Firearm Concealed Carry Act, Illinois residents are now applying and receiving concealed carry licenses, which allows them the right to bring loaded handguns into your place of business.  Police, private security, and management are helpless in stopping or removing these individuals from your place of business unless you act. Businesses who wish to prohibit guns on their premises must post clear and specific signage as dictated by the Illinois State Police at building or workplace entrances, as shown here:


The Illinois State Police have proposed allowing larger signs with additional language if the property owner believes the building, premises, or real property requires it.

In addition to the new signage, employers, building managers, and property owners must take action now to make other needed changes. Employee handbooks, workplace procedures, and commercial leases must be changed to regulate these new threats to business safety.

To download a template of the approved sign for use, visit the Illinois State Police website at https://ccl4illinois.com/ccw/Public/Signage.aspx.  Lynam & Associates is making the new State Police  signage available free of charge to their clients.  Contact Lynam & Associates, (312) 382-9600.

Lending institutions often ask or require owners of privately held businesses to personally guarantee their businesses’ loans. When a business has multiple owners, the bank may obtain personal guarantees from all the owners, and occasionally, even their spouses.  While these arrangements may seem reasonable or even necessary when obtaining financing, personal guarantees can be ruinous if not adequately negotiated or understood.

Recently, we’ve seen co-owners with personal guarantees leave businesses that subsequently fail. Unfortunately, the now-former owner does not realize that standard loan guarantees—including his—are drafted by lenders to be “continuing” in nature, meaning that the owner will continue to be liable not only for the underlying loan, but also for any renewals of the loan, and also for any further extensions of credit to the company by the lender.  Short of full repayment of all loans with the lender, the guarantee continues indefinitely.  Moreover, the former owner’s liability continues despite the fact that he is no longer involved in the underlying business, and may have no ability to control or even monitor the business’s finances.  It may be years after leaving the business before the former owner first learns that the business is in dire shape and the lender comes after him to collect.

While lenders are often willing to negotiate settlement of the owner’s guarantee, and asset protection planning can in some cases shield the owner, in all events the owner must usually proffer a substantial outlay to the lender.  Often, these hapless owners were frozen out by their former business associates, and end-up footing the bill when those associates squander the company’s assets.

We strongly recommend careful review of any guarantee language when negotiating a business loan.  Frequently, lenders ask for guarantees as “icing on the cake” that are nonessential to the making of the loan.  If the lender is unwilling to extend a business loan without some sort of surety by the owners, it may be advisable for the owners to consider signing the note itself rather than a guarantee, as an owner’s liability will terminate if and when that note is rolled over or paid off.

Disclaimer: This article is provided for general informational purposes only and is not legal advice.

What can you do when a brilliant investment opportunity presents itself, but neither cash nor financing are available?  Our firm recently helped a client find a creative solution to this dilemma.

Our clients, successful businessmen from Kankakee County, learned that a unique and highly sought after family farm was coming onto the market. Bank financing was not an option, and the clients lacked liquid funds to complete the purchase.  The clients, however, did have sufficient pension funds in IRAs to make a substantial down payment. Working with us, we identified an approach both buyer and seller embraced. Using an investment structure approved by the U.S. Tax Court in Swanson v. Commissioner, 106 T.C. 76 (1996), the clients were able to roll over their existing IRAs into new self-directed retirement accounts.  The new self-directed IRA trustee was authorized to use the IRA funds to purchase member interests in a new LLC, which we set up to purchase and operate the farm.  An installment contract was negotiated between the LLC and the seller, and the newly funded LLC made the initial payment.  An independent farming operation leased the farmland through the LLC, with farm rent being paid to the LLC. Funding for the future contract payments will come from the farm income and investors who will be offered additional member LLC interests.

Our happy clients are now the proud owners of the farm, and the seller was able to sell an illiquid asset over a period of years, while deferring a large capital gain. All revenue from the newly acquired farm will accrue through the LLC into the clients’ self-directed IRAs, and because the investment assets never leave a tax-advantaged retirement account, the clients will also be deferring income tax on the accumulating farm earnings.  The approach is one accepted by the IRS in Field Service Advice Memorandum 200128011, so the audit risk is very low.  The clients have made their new investment, and we were able to make the transaction work for them.  Dilemma: solved.

Disclaimer: This article is provided for general informational purposes only and is not legal advice.  Past results are no guarantee of future results, and the information and materials provided may not apply to any specific factual and/or legal set of circumstances.

Chair David Lynam, of the Union League Club of Chicago Entrepreneur Group, welcomed renowned interior decorator and entrepreneur Barbara Segal to the group’s monthly meeting on October 28, 2013.  Ms. Segal presented “Your Personal Brand,” which highlighted her success using Twitter to leverage her business.

Ms. Segal warned against the temptation of businesses and entrepreneurs to ignore services like Twitter, and emphasized that in today’s marketplace, consumers often make their first impressions of people and brands through social media.  Social media, thus, should not be dismissed as superficial, and instead embraced as yet another means to craft one’s own personal brand.

Discussing Twitter specifically, Ms. Segal related how she used the platform early to create a dialog with consumers and other major players within her industry.  As a result, she is now considered a “thought leader” in the world of interior design.  The key to gaining Twitter followers, she said, is to clearly define your purpose in your Twitter profile, and to be a resource for others in your posts.  This is because your existing followers are more likely to retweet posts that they believe will be useful to others.  Those retweets will expose you to more users, but those users will want to know who you are and what you can do for them before they will follow you.  Accordingly, it is important that they find that information in your profile and post history.

The Entrepreneur Group meets at 6 p.m. on the final Monday of every month at the Union League Club of Chicago.  Readers are invited to attend our next meeting on November 25th, featuring Hanna Stotland, who may be the only person to go from flunking out of High School to graduating Harvard Law.  You will not want to miss Hanna’s presentation.  Questions regarding the Entrepreneur Group’s future programs and activities can be directed to dlynam@lynamlaw.com.


Please join the Union League Club Entrepreneur Group, chaired by David Lynam, for our next monthly meeting on October 28th at 6PM, where Barbara Segal, an expert in social media and engagement, will present “Your Personal Brand.”  Come learn about the do’s and don’ts of social media in today’s world.  Twitter will be the main topic of conversation.  Understand how to perfect a professional “brand” that consistently communicates credibility and how to bring your mission statement to life.

Ms. Segal has experience working with such leading brands and media outlets as cbs.com,  Sherwin-Williams, Masco Corporation and Dyson. On a weekly basis she works with celebrities and leaders in the design, fashion, and home furnishing industries.

Feel free to bring business cards for the personal introduction segment of the meeting. There is no charge to attend the event, but please contact us to reserve your seat.

Starting today, virtually all employers—regardless of whether they provide employee health coverage—must provide employees with notice of the availability of the newly opened health insurance exchanges, as established by the Affordable Care Act (ACA).  Federal regulations require the notice to provide information on the following three items:

  1. The existence of the exchanges, including a description of the services provided by the exchanges, and the manner in which an employee may contact the exchange to request assistance;
  2. An explanation that employees may be eligible for a premium tax credit under section 36B of the Internal Revenue Code if the employer plan reimburses less than 60 percent an employee’s total allowable costs, and an employee purchases a qualified plan through an exchange; and
  3. An explanation that employees who purchase a qualified plan through an exchange may lose their employer’s contribution to any health benefits plan offered by the employer, and that all or a portion of such contribution may be excludable from income for federal income tax purposes.

The Department of Labor has provided has provided employers with sample notices that are available online at http://www.dol.gov/ebsa/healthreform/index.html (general information on the notices, with links to the samples). There are two notices available. Employers that provide a health plan should use the notice at http://www.dol.gov/ebsa/pdf/FLSAwithplans.pdf. Employers who do not provide plans should use the notice at http://www.dol.gov/ebsa/pdf/FLSAwithoutplans.pdf. Use of the appropriate model notice satisfies the ACA notice requirement.

While there are no immediate penalties for not providing the required notice, failure to do so may lead to bigger problems down the line, particularly if employees who do not receive notice about the exchanges are unhappy with coverage choices they make going forward, and claim that they were uninformed about their choices.  Accordingly, employers should endeavor to make the required notices available to employees immediately.