Your Pension Plan Could Be in Danger
It's easy to get lulled into a false sense of security about your U.S. pension plan. After all, O.J. Simpson got to keep his NFL pension, even after he allegedly killed two people, right?
Don't take that protection for granted. While pension plans that qualify for protection under the federal ERISA statute (e.g., 401(k) plans and defined benefit plans) enjoy very strong creditor protection, that protection isn't absolute.
But if a government agency is after your assets, ERISA protection melts like butter. For example, ERISA won't protect against federal tax levies and criminal forfeiture judgments. Nor will ERISA protect against federal court orders for "restitution" in white-collar crime cases.
If you live in a community property state such as California, the situation is much worse, because an innocent spouse can lose his or her community property interest in an ERISA-qualified plan.
Here's what happened in a recent California case.
The IRS placed a US$300,000 levy against a man named Jerry McIntyre. When McIntyre didn't pay up, the IRS decided to collect against his pension.
Jerry's wife claimed that she owned half of his pension under the California community property law. And since the levy was against her husband, half of the pension should not be subject to the IRS lien.
Good argument, but the 9th Circuit Court of Appeals disagreed. Under California law, the "community estate" is liable for a debt incurred by either spouse before or during marriage, regardless of whether one or both spouses are parties to the debt or to a judgment for the debt.
That's bad enough, but the court went even further to imply that even ordinary creditors can penetrate ERISA qualified plans under California law. In other words, California law actually eliminates ERISA's asset protection!
It remains to be seen whether a similar situation exists in other community property states-although I suspect that it does.
I don't have a quick answer to those who are looking for a way to plan around this horrific decision, except to say that if you want to protect your assets, don't live in a community property state. If you do live in a community property state, do everything you can to keep your individual property out of the "community estate." (Individual or "separate" property is in most community property states property you owned before you were married, or inherited after your marriage.)
In the meantime, do everything you can to build a shield around your non-pension assets to protect them from legal predators.
If you don't, any creditor of your spouse can grab your property, too...including your "asset protected" pension.