Getting sued or having to file for bankruptcy are life events that may seem so remote that few people prepare for them. However, unfortunate events do happen, often with huge financial implications.
The best way to deal with a potential negative situation is to protect yourself in advance.
A good place to start is with your HPD pension benefits. There is a section of the HPOPS statute that governs your retirement plan. It states that no part of your pension benefits (including DROP/PROP) may be held, seized, taken, detained or levied by virtue of any execution, attachment, garnishment, injunction or other writ, etc.
It goes on with a lot of legalese to basically say that your benefits have some pretty strong legal protections. So, if you lose a lawsuit or have to file for bankruptcy, the statute stipulates that your benefits cannot be taken or reduced. This provides you with a great deal of security.
Is this security absolute? Of course not.
Uncle Sam can always dock your pension check, which goes without saying. And to our knowledge these protections in our statute have never been tested in an actual court case. But as of today, no member’s pension benefits have ever been affected by any legal proceedings other than through the IRS.
There is also the exception for divorce and child support. In these two cases your benefits still cannot be reduced or attached in any legal proceedings unless you agree to do so through a Qualified Domestic Relations Order, or QDRO. These are somewhat complicated and this issue will be addressed in a future article.
Once your money leaves HPOPS and goes to your checking or savings accounts, your IRA’s or other tax-advantaged accounts, everything changes.
If you are sued by a private creditor for an unpaid debt, retirement accounts are usually protected. But there are exceptions to this rule, such as for amounts owed to the IRS and for child support. Also, many states have limited or no laws protecting your IRA accounts, so you have to do your homework and make sure you know your rights and your protections. If you have an inherited IRA, these accounts are not protected in bankruptcy unless that IRA was inherited from your spouse. You can see how complicated this can get.
It may seem that leaving your DROP/PROP money at HPOPS rather than rolling any lump-sum amounts that you may have to an IRA is the safest course of action. But if that is not for you then there are mitigating steps that you can take, such as umbrella insurance policies or restructuring the ownership of your home, which provides another level of complications.
Your best insurance is to consult with your CPA, financial planner or legal counsel to make sure that you are protected. You owe that to yourself and to your family.
HPOPS does have a financial planner available to you, and we can also provide you with wills and estate planning services.
You can sign up for these services on our website at www.hpops.org.
We will help you with knowing what questions to ask and what types of advisors you may need; however, we cannot provide legal advice or tax planning on every subject matter.
Hopefully, this article gets you off to a good start.
The information contained herein should not be used in any actual transaction without the advice and guidance of a professional tax advisor and/or an attorney who is familiar with all the relevant facts. The information contained herein is general in nature and is not intended as legal, tax, or investment advice. Furthermore, the information contained herein may not be applicable to or suitable for the individuals’ specific circumstances or needs and may require consideration of other matters. HPOPS assumes no obligation to inform any person of any changes in the law or other factors that could affect the information contained herein.