Proceeding by BCT Federal Credit Union to require Richard A. King, Individually and as Executor of the Last Will and Testament of Josephine C. KING a/k/a Josephine Catherine King, deceased, to pay the Claim of the Petitioner against the ESTATE of said decedent.
This is an action on an agreed statement of facts submitted pursuant to CPLR 3222. Petitioner, BCT Federal Credit Union, has filed four claims for monies loaned to decedent, Josephine C. King, during her lifetime. The decedent's estate does not have sufficient assets to pay the claims and is therefore insolvent.
The dispute centers upon three non-probate assets of the decedent which passed to her son, Richard A. King, and on each of which he was the designated beneficiary. The three assets are: 1) AARP 5 year term life insurance policy with a death benefit of $10,000 of which Mrs. King was the insured and owner; 2) New York State Teacher's Retirement System retirement pension from which Richard received a death benefit payment of $461,510.83; and 3) an Internal Revenue Code 403(b) account sponsored by decedent's employer, the Susquehanna Valley School District, which was invested in various Oppenheimer mutual funds with a value on September 30, 2001 of $89,730.95. BCT maintains the balance due on its claims should be paid out of these non-probate assets.
It is certainly true as recently stated by Surrogate Preminger of New York County that:
“The proliferation of testamentary substitutes, however, has left the law in a state of confusion over the rights of creditors to other assets that do not pass under the will or as part of intestate administration.” Matter of Gallet, 196 Misc.2d 303, 765 N.Y.S.2d 157, 2003 WL 21295166, NYLJ 5/9/03, p. 22, col. 1 (Surr. Ct. New York Co.).
BCT argues that § 273 of the Debtor & Creditor law applies to the estate. It provides:
“Every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to his actual intent if the conveyance is made or the obligation is incurred without a fair consideration.”
It should be noted that § 273 does not require actual intent to defraud, nor does Petitioner make any claim of actual fraud. (Letter Memorandum of April 17, 2003). Petitioner also does not claim that decedent was insolvent at any time during her lifetime, only that the estate became insolvent after her death.
The estate's attorneys respond that the insurance is exempt from creditor claims because of § 3212 of the Insurance Law. Further, that the other non-probate assets are exempted by EPTL § 13-3.2(a), which provides that the rights of a person to receive a pension, retirement, death benefit or annuity “shall not be impaired or defeated by any statute or rule of law governing the transfer of property, by will, gift or intestacy.”
The difficulty with the argument based upon EPTL § 13-3.2 is that subsection (b) specifically states that it “does not limit article 10 of the debtor & creditor law.” § 273 is part of Article 10 and thus could continue to apply despite the general language of EPTL § 13-3.2(a).
The problem with the application of § 273 is that the statutes governing pensions and insurance have so-called anti-alienation provisions. The federal law covering pensions, ERISA, has such an anti-alienation provision. 29 USC § 1056(d); IRC § 401(a)(13). However, ERISA does not apply to plans sponsored by state or local government. 29 USC § 1003(b)(1). Thus a New York State Teacher's Retirement pension is not covered by ERISA. Patterson v. Shumate, 504 U.S. 753, 112 S.Ct. 2242, 119 L.Ed.2d 519.
Both the New York insurance law applicable to the insurance death benefit and the New York Education law applicable to the Teacher's Retirement System death benefit contain anti-alienation provisions. § 3212(b)(1) of the Insurance Law provides:
“If a policy of insurance has been or shall be effected by any person on his own life in favor of a third person beneficiary, or made payable otherwise to a third person, such third person shall be entitled to the proceeds and avails of such policy as against the creditors, personal representatives, trustees in bankruptcy and receivers in state and federal courts of the person effecting the insurance.”
Clearly this law provides that the rights of a beneficiary of insurance prevail over claims of decedent's creditors. Certainly this is consonant with the primary purpose of life insurance which is to protect the dependent beneficiaries of the insured by providing them with funds to live on after the death of the insured. Thus BCT is not entitled to be paid on its claims out of the insurance proceeds in the hands of the beneficiary. Males v. New York Life, 48 A.D.2d 50, 367 N.Y.S.2d 575 (3rd Dept.1975); Matter of Adas, 70 Misc.2d 847, 335 N.Y.S.2d 128 (Surr. Ct. Erie Co.1972).
The anti-alienation provision in § 524 of the Education Law provides:
“The right of a teacher to a pension, an annuity, or a retirement allowance, to the return of contributions, any benefit or right accrued or accruing to any person under the provisions of this article, and the moneys in the various funds created hereunder, are hereby exempt from any state or municipal tax, and shall not be subject to execution, garnishment, attachment or any other process whatsoever, and shall be unassignable except as in this article specifically provided.”
The purpose of a pension is quite different from life insurance. The purpose is to insure that the employee has income to live on during retirement and later years. Only secondarily is the death benefit under a pension plan intended to provide funds to the participant's heirs and beneficiaries.
Nonetheless the courts have held that the death benefit payable to a beneficiary under a teacher's pension is exempt from the claims of creditors of the decedent. Matter of Distefano, 167 Misc. 678, 5 N.Y.S.2d 87 (Surr. Ct. New York Co.1938); Matter of Dickerson, 168 Misc. 54, 5 N.Y.S.2d 86 (Surr. Ct, New York Co.1938); Hecht v. Whalen, 174 Misc. 146, 18 N.Y.S.2d 488 (Sup.Ct. New York Co.1940); Matter of Gallet, 196 Misc.2d 303, 765 N.Y.S.2d 157, 2003 WL 21295166, NYLJ, 5/9/03 p. 22, col.1 (Surr. Ct. New York Co.); Distefano is nearly identical to the case at bar. Construing language identical to § 524 in the New York City Teachers retirement fund the court held that a pension death benefit paid to the administratrix of the deceased teacher's estate was exempt from the claim of a bank creditor. The court said:
“The underlying purpose of the statute is, first, the public good in stabilizing the status of persons in the educational system, second, the good of the member himself in guarding him against the results of his own improvidence and corollary to this the protection of the dependents of a member whose anxieties for their well-being are not a negligible factor in his public service even in the case of an improvident or unfortunate member. The Court holds that this statute immunizes the funds from the claims of creditors even after they reach the hands of the representative of the estate of the deceased member.” 167 Misc. at 680, 5 N.Y.S.2d 87.
Turning to the 403(b) annuity, we have a different situation. It is a program made available to its employees by the Susquehanna Valley School District and is not part of the New York State Teacher's Retirement System. Nor is the 403(b) plan covered by ERISA since the plan is a local government sponsored plan. 29 USC § 1003(b)(1). Thus neither the anti-alienation provisions of ERISA nor those of Education Law § 524 apply to the 403(b) plan.
The plan is established pursuant to a Salary Reduction Agreement between the School District and decedent. I.R.C. § 403(b)(7) provides that amounts paid by the employer “shall be treated as amounts contributed by him for an annuity contract for his employee.” § 403(b)(7) also provides that the amounts may be invested in a regulated investment company or mutual fund such as Oppenheimer. Thus the Internal Revenue Code treats a 403(b) plan as an annuity, even when, as here, it is invested in mutual funds. It is also a retirement plan since distributions may not begin before age 59 1/212, except in the event of disability, severance from employment or hardship, without incurring a 10% penalty. IRC § 403(b)(11), 72(t) and 4974(c).
As previously stated EPTL § 13-3.2 provides that the rights of beneficiaries in retirement plans and annuities “shall not be impaired or defeated by any statute or rule of law governing the transfer of property by will, gift or intestacy.” The Third Department has recently held in reliance on this section that an annuity is not subject to the claims of creditors. Matter of Clotworthy, 294 A.D.2d 720, 742 N.Y.S.2d 168 (3rd Dept.2002).
In an even more recent case, Surrogate Preminger has also interpreted § 13-3.2 as prohibiting creditors from reaching the proceeds of several types of retirement plans payable to a revocable trust as beneficiary. The plans included a state employee's retirement plan death benefit, an IRA and a federal Thrift Savings plan death benefit. The Surrogate said:
“The Court infers that the legislature intends that the assets enumerated in EPTL 13-3.2 are exempt from creditors' claims after death, as they are in life.
This interpretation of the statute is supported by the inclusion of subsection [b] which provides that “[t]his section does not limit article 10 of the debtor and creditor law ․”, a reference to the Fraudulent Conveyances Act. Inclusion of subsection [b] would be meaningless if the statute did not operate to extend asset protection where fraudulent conveyance is not a factor.” Matter of Gallet, 196 Misc.2d 303, 765 N.Y.S.2d 157, 2003 WL 21295166, NYLJ 5/9/03 at p. 22, col.1 (Surr. Ct. New York Co.)
§ 3212(d)(1) of the Insurance Law provides that the lifetime rights and benefits of an annuitant “shall not be subject to execution” and EPTL § 13-3.2 specifically includes under its provisions retirement plans and annuities. It follows therefore that annuities are “exempt from creditor's claims after death, as they are in life”, where, as here, there is no actual intent to defraud. Matter of Gallet, supra; Matter of Clotworthy, supra; Cf. CPLR § 5205(c) and EPTL § 7-3.1.
Either by statute or case law virtually every type of retirement plan is exempt from the claims of the decedent's creditors. Anti-alienation applies to ERISA plans (29 USC § 1056(b)), New York State employee's retirement plans (Retirement & Social Security Law § 110), New York State Teacher's Retirement plans (Education Law § 524), Individual Retirement Accounts (CPLR § 5205(c)), federal Thrift Savings plan (Matter of Gallet ), and life insurance and annuities (Matter of Clotworthy and Insurance Law § 3212). This Court perceives of no logical reason why a 403(b) retirement annuity should not similarly be exempt from the claims of decedent's creditors after death.
The cases cited by petitioner in support of its position that the payment of the retirement benefits are a fraudulent conveyance under § 273 of the Debtor & Creditor Law are not applicable. Lade v. Parker, 65 Misc.2d 369, 317 N.Y.S.2d 871 (Sup.Ct. Albany Co.1971) was a forerunner of the Court of Appeals case Kaplan v. Kaplan, 82 N.Y.2d 300, 604 N.Y.S.2d 519, 624 N.E.2d 656 (1993). In both cases an ex-wife was required to be designated as beneficiary of the teacher's pension death benefit by virtue of the terms of their separation agreement. In Kaplan, the Court of Appeals held that “a separation agreement expressly distributing pension benefits as marital property pursuant to the Equitable Distribution law is enforceable and exempt from application of the statutory anti-assignment provisions governing the TRS pension funds.” 82 N.Y.2d at 303, 604 N.Y.S.2d 519, 624 N.E.2d 656. However, the court went on to say:
“Fundamentally, the pension-protective laws were not designed to relieve a member of the Retirement System of the special obligations to support his or her dependents, but to preserve the funds from claims that are “hostile” to those of the member's dependents.” 82 N.Y.2d at 307, 604 N.Y.S.2d 519, 624 N.E.2d 656.
Thus the Court was recognizing the special status of a dependent spouse and the right to receive the benefits of the economic partnership that is marriage, as well as the contractual rights arising from the separation agreement. Similarly, there is exempted from the anti-alienation provisions of ERISA payments to a spouse pursuant to a qualified domestic relations order (QUADRO). IRC 401(a)(13)(B). Although Petitioner would like to equate the spouse's status to that of a creditor, obviously they are not the same, since the spouse is a dependent entitled to support and maintenance. The commercial creditor's status is “hostile” to the plan participant and his or her dependents and so cases directing payments out of the pension or annuity for support and maintenance of a spouse lend no support to the credit union's position.
Petitioner also cites Matter of Granwell, 20 N.Y.2d 91, 281 N.Y.S.2d 783, 228 N.E.2d 779 (1967) in support of its claim to reach the retirement benefits. Granwell again involved rights provided in the separation agreement, but for decedent's child of the first marriage. The separation agreement provided that the child must receive one half of the ex-spouse's estate at death. Decedent established a revocable inter vivos trust for his second wife and also established joint accounts with the second wife. The Court held that the trust and one half the joint property belonged to decedent at the time of his death and the child's right to one half of the estate should be paid out of those assets pursuant to the separation agreement. Again, the case is distinguishable since revocable trusts and joint property are not the same as pension or annuity benefits. There is no anti-alienation law applicable to either revocable trusts or joint property. The grantor of a revocable trust has an absolute right to terminate the trust at any time and receive back the assets, and thus is the owner of the trust assets. A revocable trust is subject to claims of the grantor's creditors. Vanderbilt Credit Corp. v. Chase Manhattan Bank, 100 A.D.2d 544, 473 N.Y.S.2d 242(2d Dept.1984). Similarly, a joint account is considered to be owned one-half by each joint owner until the death of one of them. Matter of Bricker v. Krimer, 13 N.Y.2d 22, 241 N.Y.S.2d 413, 191 N.E.2d 795 (1963) and thus was available to pay creditors. Further, the child's rights were those of a dependent entitled to support under the separation agreement. A commercial creditor has no such dependency status and again Granwell does not support the credit union's position either.
BCT also argues that § 273 applies because the estate was “rendered insolvent” by the conveyance of the insurance and retirement proceeds to Richard King pursuant to the beneficiary designations. A technical answer to this proposition, as admitted by Petitioner at page 3 of its reply brief, is that the defendant was not rendered insolvent by the mere act of designating a beneficiary. Likewise, the estate was not rendered insolvent by payment to the beneficiary because these non-probate assets never belonged to the estate or its fiduciary in his fiduciary capacity and thus the estate could not and did not make a conveyance of them. The broader answer as set forth earlier is that the Legislature has exempted insurance and retirement plan proceeds from the claims of a decedent's creditors.
Accordingly, it is held that Petitioner is not entitled to be paid on its claims from the insurance proceeds, the Teachers' Retirement System pension, nor the 403(b) annuity. The proceeds are exempt from the claims of commercial creditors.
The Court has considered the other arguments of Petitioner and finds them to be without merit.
This decision constitutes the order of the Court.
EUGENE E. PECKHAM, S.