Updated: Jan 31, 2019
With 95% of the world’s litigation taking place in the United States, one must look to provide protection for their retirement assets. As far as retirement planning goes, there is good news and bad news when it comes to protecting your retirement resources. The good news is, that it is very likely that your retirement benefits will be protected from the hands of judgment creditors. The bad news is this is an area of the law which is very confusing, and with exceptions that make it just as likely your creditors may get to your savings.
Multiple Factors are at Play
When seeking to protect your retirement assets, a number of factors come into play. A creditor’s ability to reach these funds depends on whether the Employment Retirement Income Security Act (ERISA) applies to the plan holding the assets.
When a non-ERISA plan is involved, creditors can access a participant’s plan resources unless there is a specific state law that prevents them from doing so. Non-ERISA plans include Individual RetirementAccounts (IRAs), Simplified Employee Pension (SEP) plans, non-qualified deferred compensation plans, phantom stock plans, stock bonus plans, and tax qualified retirement plans in which only the owner (and possibly the owner’s spouse) is the beneficiary.
With ERISA retirement plans, retirement benefits are protected from creditors during the period retirement assets are held in trust. Pension plans that are protected by ERISA include qualified plans, such as profit sharing plans, money purchase plans, defined benefit plans, and 401(k) plans.
In a recent court case, In Re Stern, on Feb. 4, 2003 the ninth circuit court approved transferring assets into exempt categories before filing for bankruptcy (pre-petition planning). The exempt category utilized was a profit sharing plan.
This case is helpful because it demonstrates several badges of fraud in which the trustee presented evidence that Stern;
was sued and lost the arbitration before transferring the funds to the plan;
testified inconsistently as to his motives for transferring funds to the plan;
may have, due to the $4,500,000 arbitration award, levied against him, been insolvent when he made the transfer;
transferred the funds to the plan to benefit him and his wife;
transferred all, or substantially all, of his property into the plan; and
retained control of the funds following the transfer.
The court actually held that the plan was not exempt because it did not cover a rank and file employee. Instead, the only two people covered were the debtor and his wife. This should be a reminder to us of the vulnerability of IRAs and other non-ERISA type plans, as well as the need for giving some rank and file employees a benefit under a corporate sponsored ERISA plan.
The court held the plan was not excludable from the bankruptcy estate under California law, but was exempt due to CA Code of Civil Proc. Sec. 704.115. Once again, if the plan had been an IRA or non-ERISA type plan, it would have been subject to a determination whether the amount was actually needed for retirement. Stated another way, under both federal and state law, corporate sponsored plans are favored for asset protection planning. At the end of the day, the court held the creditor must show “clear and convincing proof” before a transfer will be struck down as a fraudulent transfer.