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Federal court’s 401(k)-linked bankruptcy ruling affects Arkansas

“Thou shall not commingle.”

Those words serve as a strong admonition to any married individual in Arkansas or elsewhere who seeks to retain the status of so-called “separate” property during marriage. Mixing money or other assets so deemed with “marital” property can render their former status null and subject them to equitable distribution between partners in a divorce.

Although a tax planner commenting in a recent Investment News article utters the above command in a different context, the import is just the same. What Robert Keebler is stressing is the potential for IRA monies received from an ex-partner during divorce to become marital property if they ever become mixed with other IRA assets held by the recipient.

Bottom line: Don’t do that.

And additionally beware of the following, if you are an Arkansas resident about to divorce or in the process of decoupling and likely to receive money from a 401(k) and/or IRA account held by your soon-to-be ex.

A recent court ruling delivered by the U.S. Bankruptcy Appellate Panel for the 8th Circuit (which oversees Arkansas) stresses that money received from a spouse’s tax-sheltered accounts during divorce won’t necessarily remain immune from creditors. In a just-decided case, the tribunal stated that creditors in a subsequent bankruptcy action could access it.

The Investment News piece notes the common understanding that tax-sheltered accounts are near bullet-proof in a bankruptcy matter. That is generally true, but the 8th Circuit opinion underscores that their protection can be largely stripped when an original owner no longer controls them.

The above-cited case presents a fact pattern combining integrated and broad-based relevance for divorce, bankruptcy and estate planning. Arkansas residents with questions or concerns regarding its thrust and application can contact a Little Rock family law firm that routinely focuses on all those practice areas.

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