Asset Protection Planning for Qualified and Non-Qualified ...

Asset Protection Planning for Qualified and Non-Qualified

Retirement Plans, IRAs, 403(b)s, Education IRAs (Coverdell

ESAs), 529 Plans, UTMA Accounts, Health/Medical Savings

Accounts (MSA/HSAs), Qualified and Non-Qualified

Annuities, Long-Term Care Insurance, Disability Insurance

and Group, Individual and Business Life Insurance

(with focus on Ohio)

Section VI updated Feb 2012, includes Schwab and Merrill Lynch IRA class action suits and

further discussion of prohibited transactions

Section V added March 2012 to cover non-qualified deferred compensation

Section XI added March 2012 to add discussion of Piercing UTMA accounts

Future editions may discuss tenancy by the entireties, homestead, LLC/LP/partnership

charging order protections (or lack thereof), domestic asset protection trusts (DAPTs) and

third party created trusts

Author:

Edwin P. Morrow III, J.D., LL.M., MBA, CFP?, RFC?

Certified Specialist in Estate Planning, Probate & Trust

Through the Ohio State Bar Association

Wealth Strategies Specialist

Key Private Bank

Investment and Trust Services

10 W. Second St.

Dayton, OH 45042

(937) 285-5343

Edwin_P_Morrow@

edwinmorrow@

? 2007-2012 Edwin P. Morrow III

Table of Contents

While effort is made to ensure the material is accurate, this material is not intended as legal advice

and no one may rely on it as such. Sections II(d), II(i), V, VI and XI were updated Feb 2012, but

much of the material and citations have not been verified since 2010. Permission to reprint and

share with fellow bar members is granted, but please contact author for updates if more than a year

old. Constructive criticism or other comments welcome.

Page

I.

II.

Importance of Asset Protection

State and Federal Protections Outside ERISA or Bankruptcy

a. Non-ERISA Qualified Plans: SEP, SIMPLE IRAs

b. Traditional and Roth IRAs, ¡°Deemed IRAs¡±

c. Life Insurance

d. Long-Term Care, Accident/Disability Insurance

e. Non-Qualified Annuities

f. Education IRAs (now Coverdell ESAs)

g. 529 Plans

h. Miscellaneous State and Federal Benefits

i. HSAs, MSAs, FSAs, HRAs

III.

Federal ERISA Protection Outside Bankruptcy

IV.

Federal Bankruptcy Scheme of Creditor Protection

V.

Non-Qualified Deferred Comp ¨C Defying Easy Categorization

VI.

Breaking the Plan ¨C How Owners Can Lose Protection

(incl Prohibited Transactions and Schwab/Merrill Lynch IRA problems)

VII.

Post-Mortem ¨C Protections for a Decedent¡¯s Estate

VIII.

Post-Mortem ¨C State Law Protections for Beneficiaries

IX.

Post-Mortem ¨C Bankruptcy Protections for Beneficiaries

X.

Dangers and Advantages of Inheriting Through Trusts

XI.

Piercing UTMA/UGMA and Other Third Party Created Trusts

XII.

Exceptions for Spouses, Ex-Spouses and Dependents

XIII.

Exceptions when the Federal Government (IRS) is Creditor

XIV.

Fraudulent Transfer (UFTA) and Other Exceptions

XV.

Disclaimer Issues ¨C Why Ohio is Unique

XVI.

Medicaid/Government Benefit Issues

XVII.

Liability for Advisors

XVIII.

Conflicts of Law ¨C Multistate Issues

XIX.

Conclusions

Appendices

A.

Ohio exemptions - R.C. ¡ì2329.66 (excerpt), ¡ì3911.10, ¡ì3923.19

B.

Bankruptcy exemptions - 11 U.S.C. ¡ì 522 excerpts

C.

Florida IRA exemption - Fla Stat. ¡ì 222.21 (note-may be outdated)

D.

Sal LaMendola¡¯s Inherited IRA Win/Loss Case Chart

E.

Multistate Statutory Debtor Exemption Chart

2

4

5

7

9

13

13

16

17

18

18

20

26

30

32

35

51

52

54

56

59

61

62

68

69

71

72

73

75

78

80

85

86

88

I.

The Importance of Asset Protection as Part of

Financial and Estate Planning

Asset Protection has become a ubiquitous buzz-word in the legal and financial

community. It often means different things to different people. It may encompass

anything from buying umbrella liability insurance to funding offshore trusts. What is most

likely to wipe out a client¡¯s entire net worth? An investment scam, investment losses, a

lawsuit, divorce or long-term health care expenses? ¡°Asset Protection¡± may be construed

to address all of these scenarios, but this outline will cover risk from non-spousal creditors

as opposed to risk from bad investments, divorce, medical bills or excessive spending.

Prudent business practice and limited liability entity use (LP, LLP, LLC, Corporation,

etc) is the first line of defense against such risks. Similarly, good liability insurance and

umbrella insurance coverage is paramount. However, there is a palpable fear among many

of frivolous lawsuits and rogue juries. Damages may exceed coverage limits. Moreover,

insurance policies often have large gaps in coverage (e.g. intentional torts, ¡°gross¡±

negligence, asbestos or mold claims, sexual harassment). As many doctors in Ohio know

all too well, malpractice insurance companies can fail, too.

Just as we advise clients regarding legal ways to legitimately avoid income and

estate taxes or qualify for benefits, so we advise how to protect family assets from

creditors. Ask your clients, ¡°What level of asset protection do you want for yourself? For

the inheritance you leave to your family?¡± Do any clients answer ¡°none¡± or ¡°low¡±? Trusts

that are mere beneficiary designation form or POD/TOD substitutes are going out of style in

favor of ¡°beneficiary-controlled trusts¡±, ¡°inheritance trusts¡± and the like.

This outline will discuss the sometimes substantial difference in legal treatment and

protection for various investment vehicles and retirement accounts, with some further

discussion of important issues to consider when trusts receive such assets. Beware of

general observations like: ¡°retirement plans, insurance, IRAs and annuities are protected

assets¡± ¨C that may often be true, but Murphy¡¯s law will make your client the exception to

the general rules. The better part of this outline is pointing out those exceptions.

? 2007-2012 Edwin P. Morrow III

Page 2

Overlapping Asset Protection

Bankruptcy

(ex. Retirement plans, 529 plans)

Corp, LP, LLC

(¡°outside¡± v. ¡°inside¡±

distinctions)

ERISA

(ex. 401k)

Ohio Law

(Ex. IRAs, STRS, Coverdell ESA)

Irrevocable Trusts

(SLATs, ILITs, Gifting Trusts

(not QPRT, GRAT, CRT, Rev. Trust)

Mind the Gap

? 2007-2012 Edwin P. Morrow III

Page 3

II.

State Non-Bankruptcy Protections

There are several Ohio statutes that provide creditor protection for certain financial

assets. The most important by far is Ohio Revised Code ¡ì 2329.66, which outlines which

assets are exempt from judicial foreclosure, garnishment, sale, execution or attachment.

This and two other insurance/annuity statutes are copied into Appendix A, and many other

miscellaneous statutes are copied and/or referenced herein.

Ohio law greatly increased its protections for IRAs in 1998. Previously, Ohio law only

protected IRAs to the extent ¡°reasonably necessary for support¡±, a standard which has

been very conservatively construed by the courts.1 Under this old IRA standard (and still

the current standard for certain other retirement accounts), consideration is given to

spouses and dependents of the debtor, but not children who are not dependents.2

Aside from Ohio law, federal law may also apply to certain accounts, even when the

bankruptcy court is not involved. The Employee Retirement Income Security Act of 1974

(¡°ERISA¡±) preempts state law if the question ¡°relates to¡± employer-sponsored plans subject

to the law.3 Courts have broadly construed what ¡°relates to¡± means. This will be discussed

in the next section.

This section assumes that an owner/debtor is NOT in bankruptcy and the plan is NOT

subject to ERISA. In this case, a debtor must rely on state law or federal non-ERISA law.

The bulk of this outline concerns Ohio law, but there is some discussion of other states, and

I have purposely selected more law from our neighboring states of Indiana, Michigan and

Kentucky and from the 6th Circuit, even if a question of federal law applies.

1

In Re Herzog, 118 BR 529 (Bankr. ND Ohio 1990). There are many cases from various states where younger debtors who

could save more later for retirement were totally denied any exemption under this standard.

2

In re Guikema, 329 BR 607 (Bankr. S.D. Ohio 2005)

3

ERISA in general is at 29 U.S.C. ¡ì 1001 et seq., preemption section at 29 U.S.C. ¡ì 1144(a), anti-alienation provision at 29

U.S.C. ¡ì1056(d)(1)

? 2007-2012 Edwin P. Morrow III

Page 4

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