Memorandum of Decision Re: Exemption of Retirement Plan Benefit
NORTHERN DISTRICT OF CALIFORNIA
Chapter 7 debtor Donna Porterfield's deceased father had been a participant in his employer's ERISA-qualified pension plan. He opted to take smaller benefits during his life so that benefits would continue to be paid to a beneficiary of his choice for ten years after his death. Before his death, he established a trust and named the trust as the beneficiary of the pension benefits. Donna Porterfield is a one-third beneficiary of this trust. She has claimed her distributions from this trust as exempt. These amount to 30 payments of $805.00 each, totaling $23,345.00. The Chapter 7 trustee objects.
II. Property of the Estate
The trust established by Porterfield's father contains no spendthrift provisions. Because ERISA-qualified pensions plan benefits are inalienable, they are not property of a bankruptcy estate. Patterson v. Shumate, 504 U.S. 753, 119 L.Ed.2d 519 (1992). If Porterfield had been made a direct beneficiary of the pension plan, she would have a good argument that her benefits were not property of the estate, even though she is only in her thirties and not near retirement age, because the benefits were not property of the estate. Likewise, if the trust her father created had contained a spendthrift provision then her interest in the trust would not be property of the estate. However, since the trust is not a spendthrift trust her interest in it is property of the estate. 11 U.S.C. § 541(c). The court sees no relevance in where the trust obtained its corpus. Many trusts are set up to be beneficiaries of other trusts; the mere fact that a prior trust contained spendthrift provisions does not automatically turn all downstream trusts into spendthrift trusts.
In order for any property to be exempt, it must first be property of the estate. 11 U.S.C. § 522(b). Property of the estate consists of all legal or equitable interests of the debtor as of the commencement of the case. 11 U.S.C. § 541(a)(1). Under modern California trust law, a beneficiary of a trust has equitable title to trust assets, and not merely a personal right against the trustee to enforce the trust. 11 Witkin, Summary of California Law (9th Ed.), Trusts, § 159(b); 60 Cal.Jur. 3d (Rev), Trusts § 69 ["A beneficiary's estate is an equitable estate or beneficial interest in trust property, which is regarded by equity as the real ownership"]. Therefore, Porterfield's interest in the payments from her father's retirement plan are property of the estate, and may be exempted if there is an applicable statute, notwithstanding that they are distributed to her through a trust rather than directly. According to her, there is such a statute. Porterfield relies on California Code of Civil Procedure § 704.115(b), which provides:
(b) All amounts held, controlled, or in the process of distribution by a private retirement plan, for the payment of benefits as an annuity, pension, retirement allowance, disability payment, or death benefit from a private retirement plan are exempt.
At the time the bankruptcy petition was filed, all the funds in question were being held or were in the process of distribution as a death benefit from a private retirement plan. As Porterfield points out, the statute does not limit the exemption to the retiree. Under the plain language of the statute (which, in any event, is to be liberally interpreted in favor of the debtor), Porterfield is entitled to the exemption. The trustee argues that In re Friedman, 220 B.R. 670 (9th Cir.BAP 1998) compels that the exemption be disallowed, but the court does not agree. In Friedman, the Appellate Panel held that the term "payment of benefits" in the statute did not apply to loans from a retirement account. 220 B.R. at 672. In this case, the payments are clearly benefits.
The court's initial reaction to this matter, as expressed at the hearing, was that the exemption must be denied because the trust from which Porterfield receives the payments has no spendthrift provision. However, a review of the current state of California trust law revealed that a trust beneficiary has equitable ownership rights in the assets of the trust. This means that the pension benefits are property of the bankruptcy estate even though they are distributed through a trust. Once it is clear that the benefits are property of the estate, the right to exempt them is compelling. There is no basis for the trustee's assertion that only the retiree can make a claim under CCP § 704.115(b). Accordingly, the trustee's objection will be overruled. Counsel for Portefield shall submit an appropriate form of order.
Dated: February 18, 1999 ____________________________ Alan Jaroslovsky United States Bankruptcy