Prevent Creditors from Snatching Your IRA

Roccy DeFrancesco, JD

Physician's Money Digest, February15 2005, Volume 12, Issue 3

Many physician-investors are understandablyconcerned aboutasset protection. Many havelarge IRA balances, and unless they livein states that have specifically asset-protectedIRA assets, their IRA is not protectedfrom creditors. In addition toWashington, DC, the following states donot provide complete asset protection forIRAs: Arkansas, California, Connecticut,Delaware, Hawaii, Iowa, Louisiana, Maine,Massachusetts, Minnesota, Mississippi,Missouri, Nebraska, Nevada, New Hampshire,New Mexico, North Carolina, NorthDakota, Ohio, South Dakota, Tennessee,Utah, Vermont, Virginia, West Virginia,Wisconsin, and Wyoming.

Self-Directed Account

For those who live in the above-mentionedstates, the MAXI-IRA (ie, a self-directedIRA) is a good option. Inside theMAXI-IRA, an investor would simply directthe custodian of the IRA to purchase familylimited partnership (FLP) units with theIRA's money. Once the money is in an FLP,any potential creditor attempting toattack the IRA asset would have their remedylimited to a charging order (CO),which acts somewhat like a garnishment.

For example, if a physician had $1 millionin an IRA, they would find a custodianfamiliar with the MAXI-IRA and direct thecustodian to use the money in the IRA topurchase FLP units. The money in the FLPcan still be invested in whatever stocks,bonds, or real estate the investor wouldlike, in the same way it could if the FLPwere not involved. However, now the IRAassets have the element of asset protection,which is afforded to FLPs.

If a creditor is able to obtain a COagainst the FLP, what happens? With aCO, the creditor cannot force liquidationof the FLP or force a distribution, obtainan interest in the FLP, or direct how themoney in the FLP will be used. The creditorcan obtain any distribution made,but must sit around and wait for the FLPto do so on its own accord. If the FLPnever makes a distribution, the creditorwill receive nothing, other than perhapsa K-1 for phantom income (ie, incomethat is never distributed and that thecreditor never received).

Responsibilities Expected

The holder of a K-1 (ie, declaration ofownership) is responsible for filing andpaying income taxes on their share of theFLP's income or loss, regardless of whetheror not they receive any distribution. So, ifthe FLP generates income and no distributionsare made, the creditor holding theCO receives the K-1 the limited partnerwould have received and is liable for theincome tax thereon. No creditor in theirright mind is going to get a CO against anFLP that generates income.

For those who are paranoid about assetprotection and do not want to leave it upto US judges to dole out a CO as the soleremedy against the FLP interest, theaccount could instead be established as anoffshore limited liability corporation (LLC).If an offshore LLC is used, the remedy willstill be a CO for the creditor. The differenceis that when the LLC is offshore, the creditormust file suit offshore to obtain thecharging order, which is very expensive.

is an

attorney and author of "The Doctor's

Wealth Preservation Guide."

He has run a medical practice and

lectured for many state and

national medical associations. For

a free asset protection, income, and estate tax

reduction CD, or for questions, call 269-469-0537

or e-mail

Roccy DeFrancesco, JD,