Are my retirement assets, college savings plans, and asset protection trusts protected under the bankruptcy law?

Retirement Funds

Retirement funds that are tax exempt under sections 401, 403, 408, 408A, 414, 457 and 501(a) of the Internal Revenue Code are exempt from claims of the debtor’s creditors. Money rolled over from a pension into an IRA is also protected. However the law limits protection for funds in regular and Roth IRAs to $1,362,800  (the amount is subject to cost-of-living adjustments every three years; the next adjustment is April 1, 2022), although this cap can be increased by the bankruptcy court. Repaying a 401(k) loan is now considered a valid deduction from income for purposes of the means test and for determining how much disposable income a debtor has. A 2014 unanimous decision of the US Supreme Court ruled that inherited IRAs are not protected in bankruptcy under federal law.   

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529 College Funds

Contributions placed in a section 529 college education savings plan or in a section 530 education IRA at least 2 years prior filing for bankruptcy are off limits to creditors. Contributions made between one and two years before filing are protected up to $6,825 (this dollar amount is adjusted every three years based on the CPI; the next adjustment is April 1, 2022). Contributions made within a year of filing are not protected. The exemptions apply only when the beneficiary of the plan is a child, stepchild, grandchild, or step-grandchild (including an adopted or foster child). One of the main reasons that creditors can get to funds in a 529 account is that the debtor exercises eventual control over the monies for any purpose.  For example, if your child decides not to go to college, you may chose to take a vacation instead with the funds. Fortunately, depending on your state’s laws, you may be able to set up a plan to protect more of your child’s college savings from being taken during bankruptcy. Contact a bankruptcy attorney in your state to see if these exceptions are applicable to your situation.

Asset Protection Trusts

An asset protection trust can be established under the laws of Alaska, Delaware, Nevada, Rhode Island and Utah. Under prior law, money stashed away in those state sponsored trusts was beyond the reach of creditors. Under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), the case trustee may avoid transfers made to an asset protection trust within the past ten years with the actual intent to hinder, delay or defraud a creditor.

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