Asset Protection and ERISA

The Employee Retirement Security Act (“ERISA”) has an asset protection fail-safe mechanism built into it that ensures employees receive the benefits promised to them.  ERISA qualified plans include pensions, 401(k) plans, profit sharing plans, and defined benefit plans.  Non-ERISA plans like IRA accounts are only protected from the claims of creditors to the extent provided by state law.  We wrote about this topic in a previous article on Florida asset protection.

The Twist on State Asset Protection Laws

Under Florida asset protection laws, IRA accounts are generally protected from the claims of creditors.  Recently, the Florida Legislature made it clear that even inherited IRA accounts are exempt assets, as discussed in Asset Protection for Florida IRA Accounts.  Several years ago, however, there was confusion over that question.  There is still confusion over whether inherited IRAs are protected in Florida bankruptcy courts, though Texas asset protection laws have been clarified on that question.  As it turns out, the two states are closely related on that issue.

Asset Protection from State to State

A number of years back, a Florida State court ruled that IRA accounts inherited by a debtor are not exempt assets.  After that decision, a Florida bankruptcy court decided that inherited IRA accounts are not exempt property in chapter 7 bankruptcy filings.  The Florida bankruptcy court relied on a Texas bankruptcy decision as the authority for its judgment.

In March of 2011, a federal court overruled the Texas decision that laid the foundation for the rule in Florida.  The federal court reasoned that “retirement funds” are intended to support debtors in retirement, regardless of how such funds were obtained and should, therefore, be protected in bankruptcy.

That decision does not directly overturn the Florida bankruptcy court’s decision, but it does provide a lot of support for the idea that inherited IRA accounts should be accorded some measure of protection.  Coupled with the new Florida statute on inherited IRAs, the Texas decision lends a lot of support to the argument that inherited IRAs are now completed protected in Florida, both outside and inside of bankruptcy.

In coming weeks, we will have a lot more to say about asset protection strategies for IRA retirement accounts.  For now, it’s enough if you understand that the extent of protection afforded to your IRA is a function of state law.  If you have any asset protection questions regarding IRA accounts or any other asset protection strategy, please call us.  We are here to serve you.