While residents of San Jose and the greater Bay Area may believe otherwise, retirement accounts are not always safe from creditors.
Federal law covers retirement plans that are subject to the Employee Retirement Income Security Act, or ERISA. ERISA offers employees broad protection from creditors.
However, there are many other types of retirement plans, including for example IRAs and certain types of profit-sharing plans, which are not subject to ERISA.
California law provides debtors some protection for their retirement plans, but this protection is not absolute.
Retirement plans are protected for so long as the funds remain in the plan. Once distributed to a member, certain individual plans are only exempt to the extent necessary to allow retirees to support themselves. Creditors can attempt to take amounts in excess of this amount.
Passing down assets held in retirement plans can be tricky
Additionally, it is important for California residents to realize that the state law’s protections only apply to those who themselves are members of the retirement plan.
What this means is that, if a person wants to pass along excess assets in a retirement plan to a loved one, she will have to do so carefully. Once the loved one receives them, the funds could well be fair game for the loved one’s creditors.
Even if a loved one is financially responsible, they could still lose assets if they, for example got involved in a business investment that ends with a poor outcome.
Likewise, should the loved one wind up in a divorce or separation, he may wind up owing his spouse money, and the spouse may wind up being an aggressive debt collector.
Many San Jose residents have a lot of money invested in their retirement plans, and losing this wealth can be a real financial and emotional blow. Planning to protect one’s retirement funds is an important part of a comprehensive estate plan.