By: Louis D. Tambaro, Esq.
Any person actively doing business in the existing economic climate, no matter how conservative or cautious, faces exposure on some level to being sued. This is the reality of an increasingly litigious culture, changes to legislation, and the risks associated with any business or venture. Such potential exposure makes the protection of a businessperson’s assets paramount to his or her financial survival. One particular “gray area” that exists in the realm of asset protection is the general treatment of retirement accounts and their exposure to creditors.
The following is a brief explanation of the various types of retirement vehicles and their treatment by courts in terms of a creditor’s access:
Employer sponsored retirement plans such as 401K plans and pension plans are covered by the Employee Retirement Income Security Act (ERISA), a federal statute, and monies contributed to these plans are completely protected from creditors – with the limited exception of former spouses or the Internal Revenue Service (I.R.S.).
Unlike 401K plans, an independent retirement account (IRA) is not covered by ERISA and may be attacked by creditors. In the event of a bankruptcy filing, federal law protects up to $1 million in an IRA that was contributed to by the debtor directly, and protects the entire account if rolled over from a company plan.
Unlike federal law, which is uniform, state laws differ in their treatment of retirement accounts and creditor access. Some states such as New York, New Jersey and Connecticut exempt the entire corpus of the account; while other states vary widely on whether 1) withdrawals are covered; 2) whether protections extend to inheritors as well as the additional owners and 3) whether former spouses can attach the funds. Thus, it is critical to consult an attorney regarding both state and federal laws governing the treatment of your retirement accounts, as improper planning can leave a substantial portion of retirement assets open to creditors.
Also, individuals changing job positions must weigh the competing costs and benefits in determining whether to roll over 401K accounts to an IRA. For example, in addition to taxes and, in some cases, penalties arising from a lump-sum withdrawal of funds from a 401K leave these previously protected funds open to creditors. Also, while rolling over monies in your company’s 401K into an IRA account may defer income tax in the short term, but protection from creditors may be compensated, depending upon the state in which the person lives.
Finally, any transfer of monies from one account to another, or to a spouse, child or third-party, that is made solely to avoid creditors constitutes a fraudulent transfer and exposes an individual, and likely the transferee, to civil liability. This fact stresses the importance that a businessperson is asset-protected long before any such pending claims or concerns exist.
Marks & Klein, LLP has long assisted its business clients with asset protection counseling and needs. If you have any further questions in connection with the protection of retirement account assets please contact us at 732-747-7100 for a complementary consultation.