Bay Area Estate And Tax Planning Law Firm

Divorce, 401(k)/IRA transfers, bankruptcy and … trusts?

On Behalf of | Nov 12, 2018 | Uncategorized |

Legal commentators frequently make the point that the realm of estate planning is far broader and multi-faceted than is commonly appreciated. Legions of individuals and families in California and nationally duly note that planning applies to focused money concerns and key end-of-life considerations, but don’t immediately see the wider ramifications of estate administration.

Take bankruptcy, for instance. More specifically, consider a case where divorce, tax-sheltered account transfer and subsequent bankruptcy all have integrated relevance and can ultimately be influenced by smart and proactive estate planning.

A court from one federal judicial district recently issued an appellate ruling in just such a matter. The key facts of the case are summarized immediately below.

In a nutshell, one divorcing spouse transferred her entire IRA and half of her 401(k) account to her impending ex-husband pursuant to a divorce settlement and asset distribution scheme. Shortly after their split, her former mate declared bankruptcy. In doing so, he believed that that his ex-partner’s tax-sheltered accounts fully retained that status following their transfer to him. As such, they would always be immune from creditors’ reach.

That assumption proved false, with the above court ruling that retirement funds are not exempt from third-party collection efforts following their transfer from an original owner.

Although that ruling applies to only one appellate circuit, a recent Investment News article on the case rightly notes “that other courts could rule similarly in the future.”

Could the ex-husband have taken legal action to better safeguard his transferred assets from creditors?

One commentator in the Investment New piece stresses that the outcome could have been far different had the former spouse timely established an irrevocable trust and placed the 401(k) and IRA monies into it. Had he done so, creditors could only have claimed upon assets that flowed outside the trust, not upon those retained inside that vehicle.

Questions or concerns regarding any aspect of estate planning can be directed to a proven estate administration attorney.