The Debtor sought approval of the settlement of an Equitable Distribution, conducted in Maine, that would have allowed her to transfer funds into exempt IRAs, arguing that an Equitable Distribution rights are not property rights and therefore not an asset of the bankruptcy estate. The Trustee objected.
As a result of a recent amendment to the Maine Revised Statutes, the bankruptcy court found that the debtor had an inchoate equitable ownership interest in the individual retirement accounts of her estranged husband and that this inchoate equitable interest in the retirement accounts is property of the debtor’s estate pursuant to § 541(a)(1).
Pursuant to 26 U.S.C. § 408 (d)(6), however, the Debtor was entitle to rollover the funds from her spouse’s IRA to her IRA as the rollover would be made pursuant to a divorce decree. Accordingly, the Debtor could then exempt those funds.
The bankruptcy court ultimately approved the settlement finding that the potential prejudice to the bankruptcy estate, in losing the Equitable Distribution as an asset, was outweighed by the prejudice to the Debtor, as her ex-husband could refuse any settlement and force litigation of the Equitable Distribution in Maine. Despite fears by the Trustee of collusion between the Debtor and her ex-husband in converting the Equitable Distribution to an exempt IRA through this settlement, the bankruptcy court found that no evidence of such a conspiracy.
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