Can Creditors Reach Retirement Plans in South Carolina?
Asset Protection for Retirement Plans in South Carolina ….
Everything you need to know in only 1 page !
Unlike most other assets, retirement plans are heavily protected in South Carolina. An IRA is currently protected up to nearly $1.3Million. 401(k)s and similar plans are even more protected, with the primary exception creditors being the IRS or a former spouse.
401(k)s
An important consideration to bear in mind is if you roll-over a 401(k) to a new IRA, those funds should still receive the same protection that was provided when they were in the 401(k). Rolling over a 401(k) into an existing IRA probably negates that superior protection. Some clients whose plans are well below the threshold stated above should still consider rolling into a new IRA because in time, obviously, the account could be well above it. There are other factors to take into consideration in deciding whether to make this decision.
Inherited IRAs
A conversation I routinely have with clients (which I’ve written about before) is it’s generally better at your death to leave your assets in Trust for your beneficiaries rather than outright to them, regardless of their age or maturity. A trust created by you for the benefit of someone else is heavily protected from creditors of that other person, and they can have total control. An inherited IRA, however, is already very asset protected – it’s given the same protection stated above for IRAs of the original plan participant, so leaving it outright to your child may not be much of a concern. But, what if the beneficiary is living in a different state, whose laws are not as debtor friendly as South Carolina’s? Or, what if it’s not known what state the child will be living in when the parent dies? Given these factors among others, I think certain clients should still consider naming a Trust as the beneficiary of their IRA – in any event, it’s a conversation to at least have with the client.
Beneficiary RMD
In naming a Trust as a beneficiary, it seems like it’s become something of a default rule to include conduit provisions to easily allow the Trust to qualify to use the individual beneficiary’s life expectancy to stretch the plan, which I discussed in Part 2 of this series. But if conduit provisions are included, the RMD is required to be paid out to the beneficiary. Regardless of where the beneficiary lives, what if they have a creditor issue or later develop one? When paid out, that creditor may be able to seize the RMD as well as future RMDs. This could be a genuine concern of the client, especially if the RMDs will be sizeable. In my last newsletter, I mentioned using accumulation rather than conduit provisions to prevent disqualifying a beneficiary from receiving needs-based governmental benefits. I think including these provisions can certainly be very prudent in the creditor protection context as well – in using accumulation provisions the RMD can be maintained in Trust, rather than being forced to be paid out to the beneficiary, thus providing better protection. But, Trusts with accumulation provisions can be trickier to draft. Regardless, for certain clients I think this is worth discussing.
Next time I plan to offer my final thoughts on this series.
Contact Hamrick Law in Greenville, SC for asset protection needs!
** Disclaimer – Some people write entire books on this subject. I wrote 1 page. This is not intended as legal advice. As always, you should not act upon any such information without first seeking qualified professional counsel on the specific matter.
