Over the past several years, courts across the country have chipped away at protections for retirement assets against creditors. The protections that were previously taken for granted are now at risk. Family law practitioners should be especially cautious when advising clients on how to divide retirement assets upon divorce as recent decisions may render previously protected assets vulnerable to creditors. For most families, retirement assets are their largest or second largest asset after the family home. Consequently, attorneys must be aware of the changing case law on retirement funds and, accordingly, advise clients on how to protect their assets.
Retirement funds, such as an individual retirement account (IRA) or 401(k), are generally protected from creditors in and out of a bankruptcy proceeding. The Bankruptcy Code has been interpreted to provide that the court must balance the needs of the creditors against those of the debtor. Typically, assets included in the debtor’s estate are available to creditors and, when assets are carved out of the estate, this naturally limits the ability for creditors to be paid. Exemptions provided by the Code are essential to protecting the debtor’s needs—including the ability to, one day, retire. Because of this balance of the debtor’s and creditors’ needs, there are some known exceptions to the protections of retirement assets. For example, a traditional IRA funded by an individual (as opposed to a 401(k)) is only protected up to an inflation-adjusted cap which is currently just under $1.3 million. Another known exception to the protection of a retirement asset is for the payment of child support or alimony.
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