Protection of IRA's from lawsuit if not US resident

[george76]

I haven't seen the following question addressed anywhere. I understand that each state has different rules as to how much of an IRA is protected from a lawsuit. For example, a resident in Illinois would have different rules than a resident in California.

But how does it work if one becomes an expat? Let's say I move from Illinois to Spain and become a resident of Spain (ie spend more than 6 months of the year there). And, for whatever reason, somebody back in the US decides to sue me. How would they determine to what extent my IRA's would be protected since I would no longer be a resident of a US state? Or, since my IRA's would remain with a broker in the US, would the rules be based on which state the brokerage account is located?

Thanks in advance for advice.

 

[Texas Proud]

I could be completely wrong, but I think the protection is a federal law and the states have nothing to do with it....

Do some research.... or wait for someone who actually knows for sure...


PS... lead someone to think you might have a lawsuit coming.... care to share

 

[george76]

I could be completely wrong, but I think the protection is a federal law and the states have nothing to do with it....

Do some research.... or wait for someone who actually knows for sure...


PS... lead someone to think you might have a lawsuit coming.... care to share

No. Not that I'm aware of. Then again, anybody can sue anybody for anything in this country - whether it has merit or not. I remember looking at the yellow pages way back when and noticing how many times more pages of attorneys there were compared to doctors.

I just like to be cautious. It would be pretty dumb not to research the rules, don't you think?

AFAIK - There may be a federal law, but I thought the states could opt out of it. But not sure how that would impact an expat.

 

[daylatedollarshort]

I am not sure either, but I always thought if we did become expats I'd want to have my last state of residence a state with good asset protection laws and no state income tax.

Before moving outside the U.S. we'd probably just rent a house and live in Texas for over half a year and register to vote, get library cards, get driver's licenses, etc.

 

[Texas Proud]

Just a quick look...

New Bankruptcy IRA Exemption

Bankruptcy Protection For Your Accounts


I would also wonder how someone is going to sue you if you have moved... what harm will you be able to do when you are not there...


IOW, I have no concern that someone from Illinois is going to sue me in Illinois....

Some things are just too remote of a possibility to worry....

 

[rodi]

Also - you'll still be a resident of the US, from a tax perspective, unless your out of the country for 330 days in a calendar year.

My sister was expat in the 80's and had to plan visits home very carefully... 1 day overstay and she got hit with a big tax bill.

 

[SumDay]

This article is pretty good, and has a link to state by state breakdowns. I know you're not in a state, but someone else might be interested.

IRAs Could Be Fair Game in Lawsuits - latimes.com

I'd find a good ERISA attorney and see if he/she does free consults.

Both my lawyer and financial planner both advised us to leave our $$ in our 401k's, which may or may not be an option for you.

From the article above:

If the 401(k) is acceptable and there are no other issues compelling a rollover into an IRA, many attorneys would advise leaving the money in a 401(k).

 

[Ed_The_Gypsy]

IRAs are at risk. 401Ks are not. Remember O.J. Simpson? His 401k was judgement-proof.

 

[Ed_The_Gypsy]

This article is pretty good, and has a link to state by state breakdowns. I know you're not in a state, but someone else might be interested.

You are deemed to be a resident of the last state you lived in. Or your parents, in case you were born outside the country while they were in the military, even if you never set foot in the US.

 

[daylatedollarshort]

IRAs are at risk. 401Ks are not. Remember O.J. Simpson? His 401k was judgement-proof.

Outside of bankruptcy, 410Ks might be at risk if they are not ERISA protected and in a state without protection for retirement accounts.

I think you have to have a 401K from your job or if you have your own 401K you need a non-spouse employee for ERISA to kick in.

This article has more -
http://www.irafinancialgroup.com/solo401kassetprotection.php

 

[Gumby]

In general, when you talk about accounts being protected from lawsuits, you are talking about how they are treated when you file for Chapter 7 bankruptcy protection in the face of a large judgment against you. There are two principal statutory provisions to review:

11 U.S.C. Sec. 541 defines "property of the estate". If something is property of the estate, a bankruptcy trustee can sell it and give the proceeds to the creditors (in order of their priority). Certain property is expressly exempted as property of the estate, including ERISA qualified plans, 457b plans and 403b plans.
See 11 USC § 541 - Property of the estate | Title 11 - Bankruptcy | U.S. Code | LII / Legal Information Institute

Even if something is "property of the estate" under Section 541, it may still be exempted from distribution to creditors under the provisions of 11 U.S.C. Sec. 522, as a personal exemption. This is where one finds, for example, the "homestead exemption". Under Section 522, the debtor may choose either the federal exemptions (which are spelled out in the section) or the applicable state exemptions for his state of domicile immediately prior to filing. You can't choose to apply both federal and state exemptions. Among the federal exemptions are funds in an account under Internal Revenue Code section 408, which is the section establishing IRAs, as well as sections 401, 403, 457 and a few others. The downside of choosing federal exemptions is that the federal homestead exemption is much less generous than that available under some states' laws.

See 11 USC § 522 - Exemptions | Title 11 - Bankruptcy | U.S. Code | LII / Legal Information Institute

Note that these are just general comments about the Bankruptcy Code. Asset protection planning and bankruptcy are complex areas of law that can change greatly based on your own individual situation, including your domicile. You should consult your own attorney and not rely on anything posted here.

 

[pb4uski]

....Both my lawyer and financial planner both advised us to leave our $$ in our 401k's, which may or may not be an option for you....

I came to a different conclusion. I decided that the benefit of better investment choices with lower ERs available in an IRA compared to my 401k far exceeded the benefit of insulation from lawsuits given that I have never been sued and don't anticipate ever being sued, so I converted my 401k to my tIRA. I also had good umbrella coverage at a reasonable price.

The only thing I wish I had known then was that my after-tax 401k money could be transferred into my Roth. Not knowing that, I viewed my after-tax 401k as essentially taxable account money and took the cash and effectively reduced my taxable account withdrawals for the year.

 

[nun]

You are deemed to be a resident of the last state you lived in. Or your parents, in case you were born outside the country while they were in the military, even if you never set foot in the US.

Residency and domicile laws vary from state to state. At the Federal level it's pretty easy to prove non-US residency, it might be harder for some states and even harder to get rid of your state domicile.

 

[nun]

Also - you'll still be a resident of the US, from a tax perspective, unless your out of the country for 330 days in a calendar year.

My sister was expat in the 80's and had to plan visits home very carefully... 1 day overstay and she got hit with a big tax bill.

A US citizen will almost always have to file US tax. The only advantage a US citizen non-US resident has is that they can use things like the Foreign Earned Income Exclusion on their US taxes. If they live in a low or no tax country their residency status and FEIE becomes important as they cannot use foreign tax credits to offset US tax. But for most countries with similar tax rates to the US the US citizen's residency has little effect on the amount of tax they pay, just the relative proportion of tax they pay to the US and the country they live in.

 

[youbet]

I came to a different conclusion. I decided that the benefit of better investment choices with lower ERs available in an IRA compared to my 401k far exceeded the benefit of insulation from lawsuits given that I have never been sued and don't anticipate ever being sued, so I converted my 401k to my tIRA. I also had good umbrella coverage at a reasonable price.

These are sad, sad stories. I hate hearing that an employee, like yourself, is being absolutely screwed by their employer due to 401k or 403b programs having a poor selection of investment choices, having high expenses, or both.

 

[pb4uski]

These are sad, sad stories. I hate hearing that an employee, like yourself, is being absolutely screwed by their employer due to 401k or 403b programs having a poor selection of investment choices, having high expenses, or both.

Thanks for your sympathy.