Utilizing Retirement Plans for Asset Protection - Part III

Nonqualified Plans

Nonqualified plans include Individual Retirement Accounts (IRAs), Simplified Employee Pensions (SEP), deferred compensation plans, 403(b) plans with a custodial account, and plans that only cover an employee and his or her spouse. Nonqualified plans are not covered by ERISA's anti-alienation rule, which exposes the plan to the risk of creditor claims from both the plan participant as well as the sponsoring organization.

However, some states such as California provide some degree of protection to IRAs. Assets in an IRA or self employed retirement plan that are reasonably necessary to support the debtor and his/her dependents may be exempt from creditor claims in the state of California. However, the debtor must be able to prove financial need at time of retirement and inability to rebuild his assets if used to pay off creditors.

In a bankruptcy filing, federal law protects up to $1 million in direct IRA contributions and protects the entire account balance of moneys rolled over from a qualified retirement plan. Since tracing increases complexity, it is recommended to establish a separate IRA for rollovers from qualified retirement plans.

For more on asset protection strategies and estate litigation, call us at 310-773-0377.

*This blog entry was not written by an Attorney and should not be construed as professional legal advice.

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