Qualified retirement accounts are generally protected from seizure by creditors under the Employee Retirement Income Security Act (ERISA). ERISA protects most employer-sponsored retirement plans, such as 401(k) plans. Non-qualified retirement accounts, such as IRA’s and Roth IRA’s, are not protected by ERISA, though they have limited protection (generally up to $1 million) under the 2005 Bankruptcy Abuse and Consumer Protection Act. Significantly, in Massachusetts, retirement plans are generally treated as a countable resource for determining MassHealth eligibility for nursing home benefits.
Because the creator of an irrevocable trust typically surrenders the right to terminate or amend the instrument, a future creditor generally cannot collect against the trust, at least to the extent that trust distributions to the creator are limited. Irrevocable trusts are very useful in MassHealth planning when attempting to shelter assets from nursing home costs. They are also useful when attempting to safeguard assets from the creditors of named beneficiaries. For example, an irrevocable trust can be used to ensure that a child’s inheritance is not lost if that child gets divorced.
A revocable trust does not provide asset protection because the creator of the trust retains the right to amend or terminate the trust at any time. A creditor could therefore force you to distribute assets from the trust to satisfy any claims. Revocable trust are most useful for estate tax planning and avoiding probate, not asset protection.
Massachusetts offers an automatic statutory “homestead” exemption of $125,000 from the claims of creditors. By filing a “Declaration of Homestead” with the Registry of Deeds, this protection can be increased to $500,000 per family. The elderly and disabled are entitled to even more protection. If two owners qualify for elderly or disabled homestead protection, the aggregate protection on the home can be increased to $1,000,000. Note that statutory homestead protection does not protect a home from claims by MassHealth for reimbursement of nursing home costs.