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Jul 15
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Credit protection is essential in any form of financial planning. If you wind up on the wrong side of a damage awards you creditors naturally will want to seize your assets. As a business man, a tax deferred retirement plan may be your most valuable asset or among the most valuable.
Under ERISA, which is Federal law, defined contribution and defined benefit plans are protected from creditors in bankruptcy actions. Almost all US states extend this protection to their own courts in civil actions.
In one case, a California physician who operated his practice as a corporation filed for bankruptcy. The physician had accumulated nearly $2 million in a retirment plan. California like many other states exempts assets in a retirement plan from liquadation.
The physician’s creditors challenged the $ 2 million exemption on the grounds that it was unfair. The court agreed with the creditors that the exemption was unfair but the court found it was powerless to ignore the exemption. As a result the physician eliminated all of his debts and walked away from bankruptcy with $ 2 million. Had he withdrawn that $ 2 million from the corporation and invested it in a personal portfolio outside of a retirement plan, he would have lost the $ 2 million.
A word of note not all retirement plans are protected from creditors. A retirement plan is not protected under ERISA if it covers only owners and spouses. You need other participating employees.
Participants should include you, your secretary, accountant, even your janitor and almost everyone working for you.