In re Yerian Case Analysis

In In re Yerian, 927 F.3d 1223 (11th Cir. 2019), the Eleventh Circuit held that Florida’s retirement-account exemption protects an IRA only while the owner maintains it in accordance with the account’s own governing instrument. The debtor in this case, Keith Yerian, titled IRA-bought cars in his own name and his wife’s and used an IRA-owned Puerto Rico condominium for his own travel, so the bankruptcy court ordered the account seized for his creditors.

Yerian conceded that his IRA had lost its tax-exempt status, and the court did not rest on that concession. The lower courts had asked whether the IRA complied with section 408 of the Internal Revenue Code, which the Eleventh Circuit called a misstep. The Florida statute asks about the IRA’s own governing instrument, which can be stricter than the tax code or lag behind a change in it.

How Yerian Used His Self-Directed IRA

Keith Yerian opened a self-directed IRA with IRA Services Trust Company in 2012. The IRA’s main asset was an LLC, and through the LLC Yerian bought real estate and two used cars. He used IRA money to buy a condominium in Puerto Rico and then stayed there for purposes unrelated to the IRA. He and his wife took title to the two cars, a Smart Car and a Suburban, both bought with IRA funds. He spent thousands of IRA dollars repairing them, and his wife drove the Suburban as her own vehicle.

Yerian did not dispute that these acts of self-dealing were prohibited transactions under the Internal Revenue Code. He conceded that the IRA lost its federal tax-exempt status as of January 1, 2014, and that he had incurred more than $100,000 in tax penalties.

He filed chapter 7 on February 27, 2015, and left the IRA off his original schedules. He later amended them to disclose the IRA and to claim the Florida exemption for it. Richard Webber, the chapter 7 trustee, objected and brought an adversary proceeding. After a two-day trial in late 2016, the bankruptcy court ruled that Florida law does not let a debtor exempt an IRA operated in violation of the federal tax code. It sustained the objection and directed the trustee to seize the IRA, and the district court affirmed.

The same trial produced two other rulings. The bankruptcy court denied Yerian a discharge because he acted with fraudulent intent in the bankruptcy, a ruling he did not appeal. It also took up whether a $256,000 payment from the couple’s joint trading account to his wife was a fraudulent transfer, which became her separate appeal.

What Section 222.21(2)(a)2 Requires

Section 222.21(2)(a) of the Florida Statutes exempts a retirement fund or account from creditors’ claims and sorts accounts into three groups by how the IRS has treated their terms. Subparagraph 1 covers plans the IRS has preapproved as tax-exempt, and subparagraph 2 covers plans the IRS has determined to be tax-exempt. Subparagraph 3 covers everything else, and there the owner must prove by a preponderance of the evidence that the plan substantially complies with the tax code.

Under subparagraph 2, the one Yerian invoked, three things must be true. The IRS must have determined that the IRA’s plan or governing instrument is exempt from taxation under section 408 of the Internal Revenue Code. The IRA must since have been “maintained in accordance with” that plan or governing instrument. And no proceeding that has become final and nonappealable may have determined that the plan or governing instrument is not exempt.

In bankruptcy the objecting trustee bears the burden of proving that an exemption does not apply. The record did not show whether Yerian ever obtained an IRS determination, but the trustee never challenged the exemption on that ground, so the court treated the first requirement as met.

The third requirement was met as well. A claim of exemption is decided as of the petition date, and before February 27, 2015, no IRS or court proceeding had finally determined that Yerian’s governing instrument was no longer exempt. The court left open whether a bankruptcy court’s own ruling could ever be such a proceeding. That left the second requirement to decide the case.

What “Maintained in Accordance With” Means

The Florida exemption turns on whether an IRA has been maintained in accordance with its own governing instrument. The Eleventh Circuit corrected both lower courts for reading the statute to require maintenance in accordance with section 408. The object of the phrase “maintained in accordance with” is “a plan or governing instrument,” and the statute’s reference to section 408 identifies the instrument the IRS determined was tax-exempt.

The court said the difference will often not matter, because conduct that breaks the governing instrument usually breaks the tax code too, and it gave two examples where it does. Federal retirement law changes often, and a plan whose sponsor never amends it after a change can be maintained under its own terms while out of compliance with the Code. The Florida statute would likely still protect that account until a final proceeding determined otherwise, a safe harbor for a period after the law changes.

The court’s example was the Tax Reform Act of 1986, which forced employers to remove a common benefit formula from pension plans by January 1, 1989. The opposite example is a governing instrument stricter than the tax code. A custodian may write restrictions into it that go beyond the Code, such as a ban on real estate even though federal law permits an IRA to hold it. An IRA that satisfies section 408 but breaches such a restriction has not been maintained in accordance with its instrument, and Florida law would not shield it.

How Yerian Breached His IRA LLC Agreement

Yerian’s governing instruments were two contracts with IRA Services Trust Company, a Traditional IRA Agreement and an IRA LLC Agreement, and neither side disputed that. The IRA LLC Agreement, which Yerian signed on June 1, 2012, let him make his own investments through an LLC.

In it he promised that he had not engaged and would not engage in any prohibited transactions within the retirement account or its holdings. The agreement defined a prohibited transaction, in bold type, as a transaction between the plan and a disqualified person that the law prohibits. It named the owner and the owner’s spouse as disqualified persons, and it treated any use of plan assets for a fiduciary’s own interest or a disqualified person’s benefit as prohibited.

Yerian admitted self-dealing transactions prohibited by law. He used the Puerto Rico condominium, an asset of the IRA LLC, for his own benefit, and he and his wife took title to two cars the IRA LLC had bought and drove one as a personal vehicle. The court found it plain that he had violated the express terms of the IRA LLC Agreement and so had failed to maintain the IRA in accordance with its governing instrument. He had forfeited the exemption under section 222.21(2)(a)2.

Yerian’s two readings of the statute failed. He argued first that once an IRA is governed by proper documents it stays exempt until a final proceeding strips its tax status. The court answered that an unfavorable final proceeding and a failure to maintain the IRA are two separate ways to lose the exemption, and his reading gave the maintenance requirement no effect at all.

He argued next that an IRA stays “maintained in accordance with” an approved instrument so long as it continues to exist. The court replied that “maintain” means to continue or keep in a certain condition, which requires looking at how he ran the account over time, while “establish” means to set up. Setting the IRA up properly at the start did not save it from the later infractions.

The court also declined the trustee’s invitation to hold that shielding a tax-noncompliant IRA would be absurd. Congress lets each state write creditor exemptions as generous or as austere as it likes, and the court rested on the plain text of the Florida statute alone.

Related Decisions on Self-Dealing and Burden

A Florida bankruptcy court denied the retirement exemption for IRA self-dealing before Yerian, on a different theory. In In re Hughes, 293 B.R. 528 (Bankr. M.D. Fla. 2003), the debtor borrowed $27,000 from his IRA and lent it to a corporation he owned. The court held that the prohibited transaction caused the account to cease being an IRA under section 408(e)(2)(A) of the Code and that repaying the loan relieved only the excise tax. After Yerian, Hughes stands for its result, and the analysis now runs through the governing instrument rather than section 408.

The Eleventh Circuit applied Yerian in Kearney Construction Co. v. Travelers Casualty & Surety Co. of America, No. 18-13143 (11th Cir. Nov. 13, 2019) (unpublished), a garnishment case. Bing Kearney had pledged all of his assets, including an IRA, as collateral for a line of credit. He did not challenge the district court’s ruling that a pledged IRA is not exempt; he disputed whether he had pledged it. The court agreed with the district court that the security agreement unambiguously covered the IRA, so the account was not exempt under section 222.21.

He also argued that the “unless” clauses of subparagraphs 1 and 2 saved him because no one had ever determined that his IRA was not tax-exempt. The court answered that those subparagraphs apply only where the IRS has actually preapproved or determined the plan exempt, and there was no evidence of either. Under Florida garnishment law the account owner bears the burden of proving the exemption, and Kearney had not carried it.

What Yerian Means for a Self-Directed IRA

A self-directed IRA in Florida keeps its creditor protection only as long as the owner runs it by the custodian’s governing documents. The IRA LLC Agreement in Yerian’s case forbade exactly the personal use that also cost the account its tax status. Staying in IRA-owned real estate, titling IRA-bought vehicles personally, and lending IRA money to the owner’s own company are all prohibited transactions under the Code. In Hughes and Yerian that conduct ended the Florida exemption.

The statute cuts both ways because the governing instrument, rather than the tax code, controls. An account whose instrument has not caught up with a change in federal law likely keeps the exemption until a final proceeding holds otherwise, and the exemption is decided as of the petition date. An owner whose account is fully tax-compliant can still lose Florida protection by breaching a custodian’s stricter rule, such as a ban on real estate.

Who carries the burden depends on the forum. In bankruptcy the trustee must prove that the exemption does not apply, which is why the absence of an IRS determination did not hurt Yerian. In a Florida garnishment the account owner must prove the exemption, and after Kearney that includes the IRS preapproval or determination that subparagraphs 1 and 2 require, or the substantial-compliance showing of subparagraph 3.

Florida’s IRA creditor exemption has no dollar limit and covers self-directed accounts, and section 222.21 protects pension and profit-sharing plans on the same maintained-in-accordance-with terms. Yerian’s IRA invested through an LLC, the same structure an offshore IRA uses, and the LLC layer loosened neither the custodian’s agreement nor the Code’s prohibited-transaction rules.

Florida’s statute is one opt-out state’s answer to how retirement accounts are protected from creditors; the Bankruptcy Code lets a state replace the federal exemption list with its own, and Florida has done so. Among the Florida exemption decisions, Yerian sets the test for an IRA’s continuing protection, and it sits with the other Florida asset protection case law decisions that bankruptcy courts apply as Florida law.