Friday, December 15, 2006

Retirement accounts as an asset protection strategy

My wife and I consider our family to be at risk of frivoulous or opportunistic law suites. Specifically, our family's assets are vulnerable.

Why do we feel this way:

  1. My wife is an executive in the healthcare industry - one rife with self-serving opportunistic lawsuits.
  2. I am an entreprenuer involved in various business dealings, investments and partnerships (although less so now that I work for Big Company) - sometimes deals go south.
  3. We relatively wealthy compared to many less fortunate in our poor rural town - therefore we are a more obvious target for legal opportunism.

Consequently, we feel it is important to protect our assets. We have a great distrust of off-shore asset protection plans - too little control and too many expenses. Quite frankly, we're not even wealthy enough to consider the possibility. Perhaps when we're worth more than $5M versus our much more modest $600k (right now).

For now, we can maximize our asset protection from creditors / suitors by doing the following:

  1. Holding our house title as tentants in the entirety.
  2. Placing as much of our assets and assest growth in retirement accounts.
  3. Placing life insurance in irrevocable trusts (ILITs)

#1 is fairly easy. Your attorney can do it for you shortly after you buy your house or when you buy it.

#2 is not easy. Actually, it's very confusing. I've only learned the answers for half of the many questions I have. I'll probably have to pay a princely sum for an attorney to answer the others.

#3 is done, but not easy. It's also a great estate planning tool as the insurance proceeds bypass your estate / probate, etc.... The ILIT is funded by term policies. You gift the trust annual payments sufficient to cover the premiums. You may need an estate planning attorney to set an ILIT up, but it's pretty standard fare for most insurance brokerages.

This is where I am right now:

Priority of protection:

  1. Defined contribution plans (such as 401k, SEP-IRA, 403b) (and Simple IRAs?) are ERISA protected by federal law and are off limits to creditors - regardless of the balance.
  2. Funds rolled over from defined contribution plans into Rollover IRAs are also protected - but the owner must be careful to account for any non-rollover contributions made to the accounts - regardless of the balance.
  3. Roth and traditional IRAs were originally subject to state specific creditor laws. Documents I have read protect these accounts from creditors in NC and IL.
  4. The recent BAPCPA 2005 bankruptcy law (passed in 2006?) placed federal protections on IRAs (Roth and Traditional), but only with a limit of $1m.

The questions I have are as follows:

  1. If I roll traditional IRA balances into a SEP-IRA or 401k, will they enjoy ERISA creditor protection (i.e. unlimited)?
  2. Is my individual 401k, which is considered a defined contribution plan elsewhere in the tax code, enjoying ERISA protection? If not, what protection does it have?
  3. I have individual 401ks and SEP-IRAs -can I / should I roll one into another? If I do, what are the asset protection consequences?

Does anyone have any experience on this matter?

I'll update this posting once I hear from a few attornies. I'm waiting to hear from one of my attornies.

I've talked with the retirement experts at Vanguard who are completely misinformed. I was told "anything ending in IRA has no protection." I'm not an attorney, but I can read and the law is pretty clear Vanguard was wrong. I was very disappointed. I've asked to speak with their higher ups, hopefully I'll get a good answer.



1 comment:

Walter said...

SEP-IRAs and 401K are not ERISA protected if there is only you and your wife as owner/employees - you have to have at least one non-related employee to fall under ERISA protection.