Shielding Your Assets from Creditors (NY Times)

April 2, 2009
Protecting Retirement Accounts From Creditors
By DEBORAH L. JACOBS

RETIREMENT accounts remain among many people’s most valuable assets, even at today’s depressed values. That means you need to protect them from creditors, a category that can include former spouses or people who have won lawsuits against you.
The asset protection strategies available to you depend on the type of account you have, where you live and whether you inherited the assets or amassed the funds yourself, among other factors.

You can start by understanding the exemptions in federal or state laws that may protect your retirement accounts. The good news is that most employer-sponsored plans, including 401(k)’s, are covered by the Employee Retirement Income Security Act, known as Erisa, and are completely protected from creditors — except when those creditors are former spouses or the I.R.S., said D. James Gehring, a lawyer with Seyfarth Shaw in Chicago.

The bad news is that individual retirement accounts are not covered by Erisa. If you have filed for bankruptcy, federal law protects up to $1 million in an I.R.A. that you contributed to directly, and protects the entire account balance if the money was rolled over into an I.R.A. from a company plan, said Jonathan E. Gopman, a lawyer with Cummings & Lockwood in Naples, Fla. So it’s important to keep careful records tracing the funds.

For anything short of bankruptcy, state law determines whether I.R.A.’s (including Roth I.R.A.’s) are shielded from creditors’ claims, Mr. Gopman said.
Most states, including New York, New Jersey and Connecticut, exempt 100 percent of the assets while they are in the account. But laws in other states vary widely on whether withdrawals are covered, whether protections extend to inheritors as well as the initial owner and whether former spouses can reach the funds.

Some states limit how much is exempt — Nevada caps it at $500,000 — while California and other states exempt only what is “reasonably necessary” to support the owner and her dependents. Such wording is, inevitably, an invitation to lawsuits.

In deciding whether, under California law, an I.R.A. can be attached by creditors, courts look at the owner’s age, earning ability and other assets, said Alex M. Brucker, a lawyer with Brucker Morra in Los Angeles. If someone had a $1 million company plan that was fully protected from creditors, a court might find that a $500,000 I.R.A. was more than what was reasonably necessary and thus should not receive the same protection, he said. And in some states, an innocent misstep could leave retirement assets vulnerable to creditors’ claims.

If, for example, you have been laid off or are retiring, rolling over assets from a qualified plan, like a 401(k), into an I.R.A. has estate-planning benefits. However, if you live in or are moving to a state where I.R.A.’s are not protected from creditors, you would be better off leaving the assets in the company plan, Mr. Gehring said. So you should consult a lawyer familiar with the rules of the state where you plan to live.

If you have at least $5,000 in the plan, the company must allow you to leave the money there until you are 65, but it is not required to let you take partial withdrawals or borrow against the account, Mr. Gehring said. “If the company goes bankrupt, your money is perfectly safe,” he said, because the business must keep retirement funds in a separate trust where its own creditors can’t reach them.

If you are leaving a company that has a cash-balance pension plan, you should resist the temptation to withdraw the money in a lump sum, Mr. Gehring said, unless you need the money to live on. Upon withdrawal, the money would be exposed to creditors’ claims, and you would have to pay income tax on the full amount.

As with money coming out of a 401(k), you can defer the income tax until you make withdrawals by rolling over the money into an I.R.A., but, again, your protection from creditors will depend on the state where you live.

For example, you might be returning to work after a period of unemployment and have rolled over an I.R.A. when you left your previous employer. Most companies will allow you to transfer that money directly into their plans as you come on board, Mr. Gehring said. You might want to do that either for asset protection or to take advantage of investment offerings. This strategy also works for people who are starting their own businesses and setting up 401(k)’s, Mr. Gopman said.

Note, however, that under federal law an I.R.A. that has been converted to a Roth I.R.A. cannot be rolled back into a company plan, Mr. Brucker said.

Be aware that state and federal laws against fraudulent conveyance prohibit transfers intended to hinder, delay or defraud creditors.
As a rule, such transfers must be in place before there is even a hint of potential trouble, said Gideon Rothschild, a lawyer with Moses & Singer in New York, to be sure they are protected.

If you plan to leave at least some of your I.R.A. to your family, remember that the assets may not be protected from your beneficiaries’ creditors, depending on where the beneficiaries live.

But you can shield the assets by leaving an I.R.A. to a trust, Mr. Rothschild said. To do that, you must name the trust (which in turn benefits certain people) on the beneficiary designation form on file with the financial institution that holds your retirement account. You should be sure not to withdraw the money from the account and put it in a trust; that would make the money subject to income tax.

FDIC Warns on Foreclosure Scams, Extends Extra Protection

Buyer Beware: Tips from the FDIC on How to Protect Against Foreclosure Frauds, Easy Money Schemes and Other Costly Deals
Other topics in the latest FDIC Consumer News include the extension of $250,000 deposit insurance, more about mortgage modification programs, and shopping for a CD

Many people concerned about their mortgage, their job or their finances may be especially vulnerable to scams and other costly “fixes” for their problems. The Federal Deposit Insurance Corporation today issued a variety of tips to help consumers be on guard financially in the current economy, in areas ranging from foreclosure rescue and loan modification scams to deceptive offers of FDIC-insured certificates of deposit (CDs). The advice was published in the Spring 2009 issue of FDIC Consumer News, the agency’s quarterly newsletter for consumers, which can be read or printed online at
www.fdic.gov/consumers/consumer/news/cnspr09.
Other timely articles describe the extension of the temporary federal deposit insurance limit of $250,000 per depositor through December 31, 2013, more details about the Obama Administration’s program for lowering monthly mortgage payments through refinancing opportunities and loan modifications; various tips on shopping for a CD; and an FDIC legal opinion clarifying the deposit insurance coverage of a pre-paid card if the bank holding the money for the card fails.

protecting your assets from creditors

FLORIDA ASSET PROTECTION - Statutory Protection

--------------------------------------------------------------------------------

Much of the asset protection benefits for Florida residents is contained within the Florida Statutes. These exemptions are available to people who permanently reside in Florida.

Salary or Wages

Wages, earnings or compensation of the head of household which are due for personal labor or services, including wages deposited into a bank account (provided they are traceable and identified as such) are exempt from garnishment under Section 222.11 of the Florida Statutes.

Life Insurance Policies and Annuity Contracts

Cash value in insurance and all annuities are protected from creditors’ claims by Florida Statutes. While a Florida resident is alive, the cash value of any insurance policy he owns on his life or on other Florida residents is exempt from creditors claims. The protection afforded to the cash surrender value of a life insurance policy is only for the benefit of the owner/insured. Death benefits are not protected from the creditors of the policy beneficiary.

Perhaps the most popular financial product for asset protection planning is annuities. Florida courts have liberally construed this statutory exemption to include the broadest range of annuity contracts and arrangements. Private annuities between family members are entitled to the exemption as are the proceeds of personal injury settlements structured as an annuity. Additional protection is available by purchasing international annuities. Particularly, Switzerland and Liechtenstein have laws which guard annuities from attack by creditors for outside countries including the United States

The protection of cash value insurance and annuities extends to proceeds withdrawn by the owner. Florida courts have held that funds withdrawn from a cash value insurance policy and annuity payments received by a debtor remain protected as long as the funds can be accurately traced to a bank account readily accessible to the debtor.

Pension and Profit Sharing Plans, IRAs

To prepare for retirement and to defer income taxation more and more individuals direct significant wealth into IRA accounts and other tax qualified retirement plans. In Florida, retirement money not only defers income taxation, but is protected from creditors as well. Florida Statute 222.21(2)(a) provides that any money or other assets payable to participant or beneficiary in a qualified retirement or profit sharing plan is exempt from all claims from creditors of the beneficiary or participant. Florida Statutes specifically include under the protection umbrella pension plans designated for teachers, county officers and employees, state officers and employees, police officers, and firefighters. Disability Income

Disability income benefits under any disability insurance policy are exempt from legal process in Florida.

Automobile Exemption

Florida residents may protect up to $1,000 of equity in an automobile. The fact that a debtor need his automobile to go to work does not protect the vehicle from creditors to the extent that the debtor's equity (value less loan amount) exceeds $1,000.

Prepaid College Plans

Florida prepaid college tuition plans and Florida's 529 college saving plan are protected from creditors by Florida Statute 222.22.

Miscellaneous Exemptions

Florida Statutes include several narrow asset exemptions such as professionallly prescribed health aids, qualified prepaid college tuition, hurricane savings accounts, medical savings accounts, and unemployment benefits.