Protect your homestead, retirement plan against creditors

Q: I understand that Florida has homestead protection against creditors. Is this available in other states?

Although some states capped homestead protection at a nominal amount to avoid such debtor abuse, it remains unlimited in a few states: Kansas, Florida, Iowa, South Dakota, and Texas. Such unlimited homestead protection is a good example of why the federal legislature believed it was time to take action. Faced with a public policy need to assist those in true financial straits, and with increased public pressure to prevent able debtors from defrauding legitimate creditors, the legislature focused on making able debtors pay. In a move that encourages sound financial planning, they changed the federal bankruptcy law.

Under the new law, if you move from one state to another, until you live in your new home 40 months, the federal law caps your protected equity at $125,000. If your equity in your new home is $125,000 (or less), this cap is not a problem. Your equity is safe-today. During those 40 months, however, as the value of your home increases, your equity increases and so does the amount available to creditors.

This new federal $125,000 cap on homestead protection is important only if you file bankruptcy. It does not change your state homestead protection. It merely provides uniformity among the states by reducing the equity protected amount in states, such as Florida and Texas, with more generous homestead protection. So, what does this mean to you?

Simply put, the moral of the story is, there's no such thing as a sure thing. Laws change, and your financial plan may need to reflect those changes. A sound financial plan incorporates risk management techniques-not just insurance-based on what best suits your personal needs. The goal is to ensure that the risk management component of your financial plan provides the security you need so that you don't find yourself fleeing to Florida. If your idea of risk management still involves a move to Florida, do it early. The longer you wait, the later your 40-month clock starts ticking. It is always best to consult an attorney about such matters.

Q: If I roll over my current 401(k) plan to an IRA, will I have the same protection against creditors as I do under my qualified plan?