If your retirement funds are
in an ERISA type of plan, those funds should be safe from being taken by
creditors. But there are some "ifs".
If your plan meets the tests of being an ERISA qualified
plan, the assets in the plan can't be taken by a trustee in bankruptcy.
Second, even if your plan is not an ERISA qualified plan, it may be
protected from the claims of creditors under state law. However, there
are some exceptions to these general rules, and the laws are still
evolving. Finally, if your retirement savings are not protected by ERISA
or by state law, there are other ways to protect those assets.
Laws In Transition
In 1992, the Supreme Court made a landmark decision
(Patterson v. Shumate) relative to the rights of creditors to tax
qualified savings subject to the Employee Retirement Income Security Act
(ERISA). Basically, the court held a person's qualified plan assets are
protected from creditors in bankruptcy. Many commentators imply that
this is the final word on the topic.
However, Al Martin (an ERISA lawyer in the Kansas City area)
tells me there have been a variety of new cases about the rights of
creditors to tax qualified assets since that Supreme Court decision.
These new cases raise exceptions to the Supreme Court decision.
Meanwhile, state laws are in a state of flux.
Gideon Rothschild tells me
that New York has recently passed new laws that extend their state
bankruptcy exemptions to include all forms of tax qualified retirement
savings plans, including IRAs. These changes bring New York into line
with about half the other states that have already passed similar laws.
A syndicated column by Kathy Kristof (L.A. Times Syndicate) said that
Congress overhauled the Federal bankruptcy laws in late October, 1994.
According to Kristof, the law was effective on the date it was signed
and will make it easier for the IRS to collect their taxes, but she made
no comment about any changes that relate to tax qualified retirement
plans.
In March, 2004, the U.S. Supreme Court ruled on the subject
of whether the working owner of a business qualifies as a
"plan participant" in a pension plan covered by ERISA. At issue was the
question of whether the sole shareholder and President of a professional
corporation was a plan participant because the plan covers one or more
employees other than the sole shareholder and his spouse. This appears
to support the view that if there are no plan participants other than
the sole shareholder and his spouse that the plan is not protected by
ERISA. (Yates v Hendon, U.S. Sup. Ct. 3/2/04)
In the absence of ERISA protection, differing degrees of
protection are afforded by state law. A number of states even protect
non-ERISA plans (such as an IRA) from being taken by creditors.
In states where the degree of protection is not adequate it
may be possible to invest the assets of a self directed plan into a
limited liability company or even in an offshore annuity or a foreign
LLC.
