Posts tagged with "exempt income"

Trusts Created For Personal Benefit Are Not Exempt From Judgment Creditors

In a case before the Superior Court of Connecticut, a judgment creditor objected to the debtor’s claim of exemption for a bank account that was standing in the name of a family living trust.  The court sustained the objection and denied the exemption.

In July 2011, a judgment was entered for Karl Estes, as the custodian of the Karl G. Estes IRA, (“judgment creditor”) against Timothy Crowley (“debtor”).  The Superior Court of Connecticut issued an execution that was served upon the bank where the debtor maintained a “High Yield Consumer Savings Account” in the name of his family living trust.  The total balance of the account was removed toward satisfying the judgment, in accordance with Conn. Gen. Stat. § 52-367b(c) (2009).  The debtor then filed a claim of exemption, classifying the account as a “private pension, trust, retirement or medical savings account” under Conn. Gen. Stat. §§ 52-321a, 52-352b(m) (2009).

According to the living trust agreement establishing the debtor’s family living trust, the debtor and his wife were both grantors and trustees of the trust.  The trust was for the benefit of the two grantors and their children. The trust was divided into two grantor’s separate shares, one for each grantor, and each share consisted of an undivided one-half beneficial interest in the trust assets. During the lives of both grantors, all distributions of income and principal from the trust estate would be made one-half from each grantor’s separate share. During their joint lifetimes, the trustees had the power to pay to or apply all or part of the principal and income of each grantor’s separate share for the benefit of each grantor. The majority of the funds in the family living trust were from an IRS refund issued in connection with the debtor and his wife’s joint federal income tax return.

Connecticut law exempts any “assets or interests of an exemptioner in, or payments received by the exemptioner from, a plan or arrangement described in Section 52-321a.” Conn. Gen. Stat. §§ 52–352b(m).  However, the statute that describes which assets are unavailable to creditors, Conn. Gen. Stat. §52–321a, limits the definition to trusts or other instruments that were established as part of retirement plans or other plans qualified under various sections of the Internal Revenue Code. Such plans are “conclusively presumed to be a restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under the laws of this state.”  Id. The court found that the family living trust at issue was not a plan or arrangement described by the relevant statutes and, therefore, was not entitled to exemption from a judgment creditor on these bases.

In the alternative, the debtor argued that even if the family living trust was not entitled to exemption, the income could not be subjected to claims of creditors based on Conn. Gen. Stat. § 52-321(a).  This statute states that non-exempt income can be subject to the claims of creditors of a beneficiary only “if the property has been given to trustees to pay over the income to any person without provision for accumulation or express authorization to the trustees to withhold the income.”  The debtor argued that, given the powers of the trustees as defined in the living trust agreement, the trust income could not be subjected to the claims of creditors; therefore, the income must be exempt.

The court reached the opposite conclusion and held that the cited statute does not apply to the living trust at issue, because it was a discretionary trust established by grantors for their own benefit.  As a matter of public policy, this family living trust cannot enjoy the exemption afforded to a spendthrift trust; and as a matter of statutory interpretation, the exceptional provisions governing the liability of the income of trust find to creditors does not apply to the income of this trust. Conn. Gen. Stat. § 52–321(a). Connecticut common law has interpreted the statutory predecessor of Section 52-321(a) to mean that a trust created by a person for his own benefit cannot qualify as a “spendthrift trust” that is beyond the reach of his creditors.   See Greenwich Trust Company v. Tyson, 129 Conn. 211, 219 (1942).  The income generated by such a trust is also not protected from the just claims of creditors.  Id. at 222.

The court denied the debtor’s claim of exemption, and permitted the amount removed from the bank account standing in the name of the family living trust to be applied to the satisfaction of the judgment held by the judgment creditor.

Estes v. Crowley, FSTCV114021004S, 2011 WL 5841857 (Conn. Super. Ct. Oct. 26, 2011)

Should you have any questions relating to living trusts or other personal asset protection issues, please do not hesitate to contact Attorney Susan Maya, at SMaya@Mayalaw.com or 203-221-3100, and Attorney Russell Sweeting, at RSweeting@Mayalaw.com or 203-221-3100, in the Maya Murphy office in Westport, Fairfield County, Connecticut.

State Employee Retirement Benefits Payments are Not Exempt from Garnishment by Victims of Violent Crime

State Employee Retirement Benefits Payments are Not Exempt from Garnishment by Victims of Violent Crime

Klingman v. Winters, KNLCV020560881, 2010 WL 5493498 (Conn. Super. Ct. Dec. 8, 2010)

In a case before the Superior Court of Connecticut, a victim of a violent crime sought to have a wage execution enforced against the retirement payments of her convicted assailant in order to collect the awarded judgment. The court found that the claim for a wage execution was valid and enforceable.

The plaintiff was awarded a $240,000 judgment for injuries she sustained from a physical attack by the defendant. The judgment was entered on a four-count complaint claiming negligence, reckless and wanton assault, intentional assault and violation of the Violence Against Women Act of 1995, 42 U.S.C. § 13981, based upon the applicable Connecticut General Statutes. The defendant declared bankruptcy; however, the bankruptcy court found that the plaintiff’s judgment was not subject to bankruptcy exemptions. In its memorandum of decision, the bankruptcy court characterized the attack as “vicious and brutal” and the injuries inflicted as “willful and malicious.”

A wage execution was entered against the defendant and the defendant’s employer, the State of Connecticut, and was paid to the plaintiff until the defendant retired. The plaintiff applied for a new wage execution, which was served on the State and returned by reason of the defendant’s retirement. The State contended that it discontinued payments on the wage execution because the defendant was placed on hazardous duty disability retirement and the execution was impermissible according to Connecticut law prohibiting assignments of state employees’ retirement benefits, Conn. Gen. Stat. § 5-171.

Under Connecticut law, retirement benefits of state employees are intended to support the member or beneficiary who is entitled to those payments; therefore, any assignment of such benefits is “null and void.” Conn. Gen. Stat. § 5-171. These benefits are “exempt from the claims of creditors.” However, if these general provisions are contrary to the law governing a particular circumstance, the law dictates “any payment shall be exempt to the maximum extent permitted by law.” Id. Connecticut law governing the general availability of retirement income to creditors, Conn. Gen. Stat. § 52-321a, exempts “any pension plan, annuity or insurance contract or similar arrangement … established by federal or state statute for federal, state or municipal employees for the primary purpose of providing benefits upon retirement by reason of age, health or length of service” from the claims of all creditors of the plan beneficiary. Conn. Gen. Stat. § 52-321a(a)(5). However, this law also provides a specific exception for victims of violent crime: “Nothing in this section … shall impair the rights of a victim of crime … to recover damages awarded by a court of competent jurisdiction from any federal, state or municipal pension, annuity or insurance contract or similar arrangement … when such damages are the result of a crime committed by [the] participant or beneficiary.” Conn. Gen. Stat. § 52-321a(b).

The plaintiff argued that the defendant’s retirement payments should be garnished pursuant to the Connecticut law governing the availability of retirement income to creditors, Conn. Gen. Stat. § 52-321a. She asserted that this law governed her particular circumstance as a victim of violent crime, and established an exception to the exemption of state employee retirement benefits stated in Section 5-171.

The plaintiff’s argument raises an issue of first impression in the Connecticut. Connecticut appellate courts have not addressed the specific issue of a victim’s right to enforce a withholding order pursuant to law governing the availability of retirement income to creditors, Conn. Gen. Stat. § 52-321a. Discussion of the general applicability of this law has been limited to trial court decisions regarding alimony and child support obligations. These cases have consistently found that pension benefits covered by Section 52-321a are not exempt from income withholding orders. See, e.g., Sinicropi v. Sinicropi, 23 Conn. L. Rptr. 49 (Conn. Super. Ct. 1998); Foley v. Foley, 20 Conn. L. Rptr. 644 (Conn. Super. Ct. 1997).

The court found that the plaintiff was a victim of a crime; therefore, her claim for a wage execution upon the retirement benefits of the defendant fell within the statutory exception of Section 52-321a(b) and constituted a particular circumstance that fell within the statutory exception of Section 5-171. The court ordered that a wage execution may issue against the retirement benefits payments to the defendant by the State of Connecticut.

Should you have any questions relating to personal asset protection issues, please do not hesitate to contact Attorney Susan Maya, at SMaya@Mayalaw.com or 203-221-3100, and Attorney Russell Sweeting, at RSweeting@Mayalaw.com or 203-221-3100, in the Maya Murphy office in Westport, Fairfield County, Connecticut.

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