Creditor protection utilizing exempt retirement
assets is not a new concept, but has become increasingly important in today's
litigious society. This is particularly
true for professionals like physicians and risk taking businesspersons who may
have significant exposure to lawsuits and the means to defer substantial
earnings toward retirement. It is
important to keep in mind that these protections are not always absolute, other
limitations apply in bankruptcy, and once funds are withdrawn from these
protected assets, they become accessible to creditors.
ERISA Qualified Plans
The federal
Employer Retirement Income Security Act of 1974 ("ERISA") regulates ERISA
"qualified plans" and preempts state law.
These plans consist of employer-sponsored retirement plans, such as a
401(k), pension, or profit-sharing plans.
Under federal law, an ERISA qualified plan is off-limits to creditors
because it contains an anti-alienation clause.
However, there are two common exceptions to be aware of. First, qualified domestic relations orders
("QDROs") can reach plan assets as part of a divorce or support
obligation. Second, qualified plan
assets are subject to tax levies and judgments by the federal government (i.e., the IRS can seize these assets to satisfy unpaid federal
income taxes). It is noteworthy that
there is no similar exception for state governments. Thus, New York cannot collect unpaid state
income taxes from ERISA qualified plans.
Other Retirement Assets
Like many states, New York has extended creditor
protection benefits to retirement assets other than ERISA qualified plans. New York's CPLR 5205(c) specifically provides
protection from creditors seeking to enforce money judgments against Roth,
traditional, SIMPLE and SEP IRAs, Keogh or HR-10 plans, 401(k) plans, 457
deferred compensation retirement plans, etc.
Notably, New York's protections are not limited to a specific dollar
amount or the debtor's needs during retirement.
However, as with
ERISA qualified plans, New York's protections are not absolute. First, contributions to a retirement asset
within 90 days before the entry of a money judgment are not protected. Second, creditors can attack retirement
assets to the extent such assets were contributed through a fraudulent
conveyance. Third, retirement assets are
not protected from QDROs or orders of support, alimony or maintenance due to a
divorce or legal separation.
Finally,
most asset protection benefits enjoyed during lifetime do not terminate with
the debtor's death. New York's EPTL
13-3.2, the companion to CPLR § 5205(c), extends creditor protection against
the claims of a decedent's creditors.
Moreover, New York case law strongly supports the continuation of lifetime
protections to a decedent's retirement assets after death. See Matter of King, 196 Misc. 2d 250,
255, 764 N.Y.S.2d 519, 523 (Sur. Ct. Broome County 2003) ("Either by statute or
case law virtually every type of retirement plan is exempt from the claims of
the decedent's creditors.").
Subject to the exceptions and limitations discussed
above, making contributions to retirement assets can offer excellent creditor
protection.
David R.
Schoenhaar is an associate at Ruskin Moscou Faltischek where
he is a member of the firm's Trust & Estates Department.