On April 9, 2018, Lillig & Thorsness, Ltd. appellate attorney Edward R. Sherman with the collaboration of transactional and tax partner David R. Stallter secured a reversal of a trial court’s order compelling a client’s broker to turn over the proceeds of the client’s IRA in excess of $1,000,000.
The case originated in Michigan as a collection action against a personal guaranty and was subsequently domesticated in the Circuit Court of DuPage County. The total judgment amount with interest exceeded $1,000,000. At hearing the trial court found that the client’s withdrawal of funds from his IRA that were subsequently used to pay for non-retirement expenses caused the assets remaining in the client’s IRA to lose their exempt status under the Internal Revenue Code’s provision regarding prohibited transactions (26 U.S.C. § 4975(c)) and thus lost their exempt status under Illinois law. The trial court ordered that the account proceeds be turned over to partially satisfy the creditor’s judgment.
Mr. Sherman entered an appearance on behalf of the client and filed an appeal. As part of the appeal process, Mr. Sherman successfully argued to the trial court to have the account frozen as security on appeal as well as other property in lieu of a bond. This strategy protected the client from having to liquidate other IRAs to use as an appeal bond, which the creditor may have been able to attach post-appeal if the trial court subsequently found that those proceeds lost their exempt status by being used as security for the appeal.
On appeal, Mr. Sherman argued that the use of assets withdrawn from an IRA account did not constitute the use of the “plan assets” of the client’s IRA and were not a prohibited transaction involving the IRA pursuant to 26 U.S.C. 4975(c). The result was an order that the client’s IRA remained exempt and a reversal of the trial court. The Appellate Court’s Order may be found on Illinois Court's website.