TAX BREAK

Protecting Retirement Accounts From Creditors

by Nick R. Taylor

 

The world of creditor protection planning for retirement benefits has changed dramatically in April of 2005 and these changes benefit the owners of retirement accounts.

 

 The Past

 

By the way of background, assets that are part of a bankrupt estate and which are not subject to any exemption are at risk of the owner’s creditors. However, in 1992, a famous U.S. Supreme Court case by the name of Patterson v. Shumate ruled that a qualified pension plan covered by ERISA is not an asset of the bankrupt estate. This ruling was because under federal law the benefits under a pension plan could not be assigned or alienated (even for the benefit of creditors). Note however, that this holding only applied to “employee benefit plans”. In other words, the exclusion did not apply to IRAs or Roth accounts. It also did not apply to plans that did not constitute “employee” benefit plans. For example, if a company had only the business owner and/or spouse as a participant, this was not considered to include an employee so those qualified plans were at risk to creditors.

 

If a retirement account or any other asset was part of the bankrupt estate, it was then dependent upon the debtor to rely on federal exemptions or state law exemptions to see if the amount could still be protected. Under federal bankruptcy exemptions, retirement assets were exempt from creditors to the extent needed for support of the debtor and/or his or her dependents. Support has typically been construed very narrowly. Historically this exception was not available for IRAs.

 

 The Present

 

The first dramatic change in retirement plan protection occurred by the U.S. Supreme Court ruling in the case of Rousey in early April. Rousey held that the same exemption for support for retirement plans also applied to IRAs.  The case did not rule, however, as to impact upon Roth accounts. Moreover, this exemption is only applicable to the extent the debtor can prove the need of the IRA for support.

 

 The Future

 

The above positive news of Rousey, however, was greatly expanded, and trumped by the passage of the Bankruptcy Abuse and Consumer Protection Act of 2005, which was signed into law on April 20, 2005, and will take effect 180 days later. For any bankruptcy filed after the effective date of the statute, a new bankruptcy exemption will be applicable for all tax qualified retirement benefits. This exemption explicitly applies to not only retirement plans, but also to IRAs, Roth IRAs, 457 Plans and 43(b) plans and will likewise apply to solo business owner plans.

 

Under the new Bankruptcy Act, all retirement accounts are exempt subject to one limitation. In the case of Roth IRAs, traditional IRAs, and simple Retirement Accounts, the exemption is only applicable to the aggregate value of $1,000,000 - - but IRA amounts attributable to any rollover contributions or earnings on such rollover contributions are exempt without any dollar limit. In other words, all rollover contributions into those particular IRA-type accounts are exempt plus $1,000,000 of non-rollover funds within such accounts. Additionally, all retirement plan accounts would be exempt. There is no requirement to show any need of support.

 

Continued

 

 

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