Scott Andrew McFarland and Yvonne Heather McFarland

OCR transcription for search; preserved printed pages are authoritative

Case 04-01623-JDP Doc 28 Filed 09/03/04 Entered 09/07/04 11:28:00 Desc

BAO TIA
(Rev, 8/82)

AUTHENTICATE
U.S. GOVERNME
INFORMATION
GPO

Converted from BANCAP Page 1of8

U.S. Bankruptcy Court
District of Idaho

Filed: September 3, 2004
At: 9:00 a.m.

By: Sylvia Wirth .

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF IDAHO

In Re:
Bankruptcy Case
SCOTT McFARLAND and No. 04-01623
YVONNE McFARLAND,
Debtors.
MEMORANDUM OF DECISION
Appearances:

Randal J. French, BAUER & FRENCH, Boise, Idaho, Attorney for
Debtors.

Bernie Rakozy, Boise, Idaho, Chapter 13 Trustee.

The Chapter 7 ‘Trustee, Bernie R. Rakozy, objected to Chapter 13

Debtors Scott and Yvonne McFarlands’ claim of exemption under Idaho Code

MEMORANDUM OF DECISION - 1

SAO TIA
(Rev, 8/82)

Case 04-01623-JDP Doc 28 Filed 09/03/04 Entered 09/07/04 11:28:00 Desc

Converted from BANCAP Page 2 of 8

§ 11-604A(5) as to their daughters’ college savings plans. Docket Nos. 7, 11. The
Court conducted a hearing concerning Trustee’s objection on August 17, 2004, at
which both parties appeared. Docket No. 26, What follows are the Court’s
findings of fact, conclusions of law and disposition of the issues. Fed. R. Bankr. P.
7052; 9014.
Facts

According to the plan documents admitted in evidence at the hearing,
on March 23, 2001, Mrs. McFarland established an account in the Idaho College
Savings Program (commonly known as “IDEAL”) and designated her oldest
daughter as the account beneficiary. Ex. A at 1-4. As a state employee, she could
contribute to the plan via payroll deduction, and she authorized a $15 deduction
each pay period. Ex. A at 1-4. Mrs. McFarland updated her application on
January 29, 2002, at which time she established a second account, designating her
youngest daughter as a beneficiary. She increased her payroll deduction to $30
each pay period. Ex. A at 7-8. Debtors have a total of $1,998 on deposit im the two

IDEAL accounts. Schedule C, Docket No. 7.

MEMORANDUM OF DECISION - 2

Case 04-01623-JDP Doc 28 Filed 09/03/04 Entered 09/07/04 11:28:00 Desc
Converted from BANCAP Page 3 of 8

The program disclosure booklet, Ex. B,' mdicates that the Idaho
College Savings Program (the “Program”) was designed to help individuals save for
the costs of education after high school. The Program is authorized by Chapter 54,
Title 33 of the Idaho Code; it is managed by the Idaho College Savings Program
Board established by the State of Idaho. Ex. B at 1, 7. The individual opening the
account is considered the account’s owner, and “all rights under the Participation
Agreement belong to . . . the Account Owner and not to the Beneficiary,” even
though the funds held in the account are intended by the depositor to pay for the
beneficiary’s qualified education expenses. Ex. B at 5. Earnings on the account
receive favorable tax treatment. Only the account owner can direct withdrawals,
and withdrawals that are for anything other than qualified higher education
expenses are subject to a tax penalty. Ex. B at 24-27.

Disposition

Trustee argues that the exemption statute relied upon by Debtors,

Idaho Code § 11-604A, was not meant by the Legislature to cover benefits that are

payable to a beneficiary other than the debtor. However, Debtors contend that the

' IDEAL also maintains a website, www.idsaves.com, providing information
concerning the program and copies of the plan documents.

MEMORANDUM OF DECISION - 3

© AO 72A
(Rev. 8/H2) if

BAD T2ZA
(Rev. 8/82)

Case 04-01623-JDP Doc 28 Filed 09/03/04 Entered 09/07/04 11:28:00 Desc

Converted from BANCAP Page 4 of 8

Legislature provided no such restriction in the statute, and expressly declared its
intent in the statute to exempt any rights accruing to an employee as the account
owner.

Idaho has “opted-out” of the federal bankruptcy exemptions, and its
citizens are limited to the exemptions allowed under state law. 11 U.S.C. § 522(b);
Idaho Code § 11-609. Exemption statutes are to be liberally construed in favor of
the debtor. /n re Duman, 00.3 LB.C.R. 137, 137 (Bankr. D. Idaho 2000). Trustec
bears the burden of proving that Debtors’ exemption is not properly claimed. Fed.
R. Banks. P. 4003(c). While debtors do not surrender their assets to the trustee for
creditors in a Chapter 13 case, exemptions are important for determining whether
the debtor’s plan satisfies the “best interest of creditors” test for confirmation under
11 U.S.C. § 1325(a)(4).

The Idaho Legislature enacted Idaho Code § ]1-604A to protect an
individual’s retirement income. Idaho Code § 11-604A(1). In addition to
traditional forms of retirement funds such as pensions or annuities, the statute
exempts “any other right accrued or accruing to any citizen of the state of Idaho
under any employee benefit plan, and any fund created by the benefit plan or

arrangement... .” Idaho Code § 11-604A(3). Employee benefit plans are

MEMORANDUM OF DECISION - 4

Case 04-01623-JDP Doc 28 Filed 09/03/04 Entered 09/07/04 11:28:00 Desc
Converted from BANCAP Page 5 of 8

“deemed to be a spendthrift trust, regardless of the source of funds, the relationship
between the beneficiary and the trustee or custodian of the plan, or the ability of the
debtor to withdraw, borrow or otherwise become entitled to benefits from the plan
before retirement.” Idaho Code § 11-604A(5).

A college savings plan is unlike the classic pension plan, and would
likely not be considered an employee benefit plan. But in the statute, the Idaho
Legislature expressly included within the definition of “employee benefit plan”
“any rights accruing on account of money paid currently or in advance pursuant to
a college savings program described in chapter 54, title 33, Idaho Code.” Idaho
Code § 11-604A(4)(b). Idaho Code §§ 33-5401-5408 provides for Idaho’s college
savings program, established under authority of § 529 of the Internal Revenue
Code. See Idaho Code §§ 33-5402(4) (authorizing changes to the program required
to obtain federal income tax benefits under § 529 of the Internal Revenue Code);
5403(6)(a) (requiring the program to remain compliant with section 529 of the
Internal Revenue Code to be treated as a qualified state tuition plan). Account
owners have control over the disposition of the funds in the account according to
the guidelines established in Idaho Code § 33-5404, including the ability to

withdraw funds at any time (subject to a penalty if the withdrawn funds are not

MEMORANDUM OF DECISION - 5

AO T2A
(Rev. 8/82)

Case 04-01623-JDP Doc 28 Filed 09/03/04 Entered 09/07/04 11:28:00 Desc
Converted from BANCAP Page 6 of 8

used for “qualified” educational purposes) or to change beneficiaries. A designated
beneficiary has no rights or legal interest in an account unless the designated
beneficiary is also the account owner. Idaho Code § 33-5407(1)(a).

Given this statutory scheme, the funds on deposit in Debtors’ college
savings accounts are exempt under the express terms of Idaho Code § 11-604A.
Though the primary purpose of the statute relates to protection of funds on deposit
for a debtor’s benefit in retirement plans, the statute expressly includes within its
scope the college savings program established by Chapter 43, Title 33 of the Idaho
Code. The IDEAL program in which Debtors participate is such a program. Thus,
the money Debtors have saved in the accounts is exempt. Finally, contrary to
Trustee’s suggestion, Idaho Code § 11-604A contains no requirement that the

employee be the beneficiary of the plan as a condition of the exemption.

Conclusion
Idaho Code § 11-604A allows Debtors to exempt the money on
deposit in the IDEAL college savings accounts established for the benefit of their
daughters. Trustee’s objection to Debtors’ claim of exemption will therefore be

denied by separate order.

MEMORANDUM OF DECISION - 6

SAD FLA
(Rev. 8/82)

AD 72A
(Rev. 8/82)

Case 04-01623-JDP Doc 28 Filed 09/03/04 Entered 09/07/04 11:28:00 Desc
Converted from BANCAP Page 7 of 8

DATED This 3rd day of Sept

JIMD.PAPPAS \-7 OS

U.S. BANKRUPTCY JUDGE

MEMORANDUM OF DECISION - 7

Case 04-01623-JDP Doc 28 Filed 09/03/04 Entered 09/07/04 11:28:00 Desc
Converted from BANCAP Page 8 of 8

CERTIFICATE OF SERVICE

[, the undersigned, hereby certify that I served by the method
indicated below, a true copy of the document to which this certificate is attached, to
the following named person(s) at the following address(es), on the date shown
below:

Office of the U.S. Trustee
jeff.g howe@usdo]. voy
ary.mcclendon(@usdoj. gov

Randal J. French, Esq.
rirench(@)bauerandtrench.com

Bermie Rakozy
brrakoz indspring.com

Via Email

Note re E-mail service: A ".pdf" version of the above decision/order was electronically transmitted to the
parties indicated above. Email service is provided as a courtesy only upon request of a party. To review an
electronic image of the original of this document, or to subscribe for email service of future
decisions/orders from the Bankruptcy Judges, please access the Court's Intemet web site,

Wwww.id uscourts. ZOvV.

CASE NO.: 04-01623 CAMERON 8. BURKE, CLERK
U.S. BeRuPny COURT
DATED: 9/3/04 By StWia Wirth, Deputy Clerk

MEMORANDUM OF DECISION - 8

SAD TIA
(Rev. 8/82)