Creditor-Protected IRAs Offered by Delaware Companies

October 13, 2004 ( - Amid fears that Individual Retirement Account (IRA) funds may not be protected if the holder is sued or files for bankruptcy, two Delaware companies are offering accounts that take advantage of the state's generous asset-protection and trust laws.

Wilmington, Delaware-based NatCity Trust Co. and Capital Trust Co., are now offering IRA plans for wealthy professionals that operate like typical custodial IRAs, where money is held in a bank or investment firm, but offer the protection of a trust.

401(k)s and other employer-sponsored plans are protected from creditors under the Employee Retirement Income Security Act (ERISA). IRAs, however, generally are not. They are instead protected by state laws, which vary on the protection they offer. While most states have broad protection from creditors for IRAs, Delaware stands out because of the use of specific language called a ‘spendthrift provision’, which is meant to limit the rights of creditors to reach the funds in IRAs.

The goal of the accounts is to protect the holder from legal challenges or bankruptcy. The funds, however, are still subject to divorce proceedings, since family-court judges have wide-ranging powers in splitting up assets.

These ‘Delaware IRAs’ are targeted at wealthy individuals, and charge moderately higher fees than normal IRAs, which have a simpler structures. NatCity charges around 1.1% of assets annually, with a minimum account balance of $750,000. Capital Trust, which sells its services through financial advisors, charges an administration fee of 0.3% on funds up to $1 million, with a minimum fee of $1,250. By comparison, a Merrill Lynch typical IRA has fees of 0.25% of assets, and a minimum fee of $50.

Whether or not the Delaware IRA will stand the test of the legal system is nebulous at best. The asset-protection measure landscape may shift shortly, with the US Supreme Court about to voice its opinion on the issue in the case of Rousey v. Jacoway. This case pertains to the legality of protected IRAs whose owners are in Chapter 7 bankruptcy proceedings.

For more information, please see NatCity Trust’s Web site at . Capital Trust Co. can be accessed at .