We referenced in a recent blog post what one national publication termed “a really big case” in the realm of divorce-linked asset transfer and distribution. Our November 15 post focused specifically on the common scenario involving the transfer from one divorcing spouse to the other of company-sponsored retirement funds and individual retirement accounts, respectively.
As we noted in that entry, monies held in 401(K) and IRA accounts are typically deemed safe from creditor’s reach. They are regarded by law as protected retirement vehicles. The above-cited Investment News article stresses that they are “untouchable by creditors.”
That sense of inviolability is what leads many financial advisers – and some family law attorneys, too – to quickly target such accounts in a divorce and simply recommend (without much, if any, thought afterwards) that they be transferred during a decoupling as part of an equitable asset split. What was formerly yours is now mine, transferred to one or more accounts held in my name.
The commonly held assumption regarding that is this: The creditor protections that previously attached to such accounts will continue to exist, but now for the spouse transferee.
A recently issued ruling in the aforementioned “big case” renders that view less than absolute. In fact, a decision authored by the 8th U.S. Circuit Court of Appeals urges a strong caveat to its holding, that is, a warning to any divorced spouse who received transferred retirement assets.
That is this: Don’t go bankrupt. If you do, the assets that were deemed creditor-exempt for the original owner might no longer command the same status.
Bottom line: They could be seized by third parties owed money.
The referenced case only applies in states where the 8th Circuit holds reach (which does not include New Jersey, over which the 3rd Circuit holds sway).
The decision could certainly have precedential value, though. Moreover, the subject matter it focuses upon is sufficiently important to merit a close look from divorce attorneys across the country in any case, given the heavy importance of divorce-related asset distribution and future protection.
New Jersey residents with questions or concerns regarding asset identification, transfer and protection in a divorce can reach out for guidance and diligent representation to a proven Middlesex County family law firm.