Some Thoughts on Asset Protection and Liability Limitation Strategies: What OJ & Lance Armstrong Did

Retirement plans offer some long-term protection even in the event of a Black-Swan event such as a bankruptcy. While the discussion of 401(k) plans and Roth IRAs generally revolve around tax-deferred growth benefits, these devices, along with insurance-based vehicles, really show their true potential in terms of their respectively available asset protection features–even in the event of a bankruptcy.

OJ Simpson has had a judgment of $33 million plus against him since 1997. Yet, Simpson’s NFL defined benefit plan still holds over $4 million that is sheltered under ERISA law from his creditors on that judgment: the Ronald Goldman and Nicole Brown-Simpson families.

Similarly, Lance Armstrong has faced several lawsuits from entities seeking to recoup their payments to him after Lance admitted to doping while winning seven Tour de France races. These creditors even include the US Government and the US Postal Service! Yet, because Armstrong did a lot of asset protection planning in the form of trusts to help shield his assets, his retirement assets will likely stay away from the reach of creditors.

Currently, 401(k) plan assets are protected in an unlimited dollar amount against creditors in bankruptcy proceedings. Upon retirement, if the employee/investor transfers the 401(k) balance into a rollover IRA, and doesn’t commingle those same funds with personal contributions to the same IRA, the protection from creditors remains unlimited. But, IRAs comprised only of traditional IRA contributions and IRAs comprised of rollovers from an employer plan commingled with personal IRA contributions are capped at a maximum of $1.245 million (continues to be inflation-adjusted from 2005 basis).

Several states like California have become increasingly aggressive in pursuing traditional IRA assets in liability cases. So, investors should seek to keep as much as possible in segregated ERISA-sponsored retirement investments, as they still provide unlimited protection for the assets in the plan, even against these aggressive states.

Bottom line:  good asset protection planning can start with such a simple move as keeping proper form in your retirement plan assets.