What debt collectors can and can’t take in Texas: A guide to protected assets

Q: What assets are protected from seizure by collection agencies that have purchased a person’s unsecured outstanding credit card debt if they are awarded a judgment by the courts? Are retirement accounts, pensions, second homes, stocks, Health Savings Accounts and wages protected?

A: Under Texas law, your homestead, life insurance, annuities, certain personal property (up to $50,000 for a single adult, and $100,000 if married), HSAs, and 529 college savings accounts are fully protected from a judgment for an unsecured debt. Under both Texas and federal law, retirement accounts, qualified plans, and most pensions are exempt from creditors as well.

There are exceptions that might apply to other types of debts, such as mortgages, taxes and unpaid child support.

If you have a second home or other non-homestead real estate, or if you have a non-retirement brokerage account which holds stock market investments or mutual funds, those investments will not be protected.

Wages would generally be protected from garnishment, but once you deposit your wages into a bank account, they might become accessible to creditors.

Q: Our IRAs are set to go into a Special Needs Trust for our son. Our son is receiving Medicaid benefits; does he have to take the distributions, which could disqualify him, or can they be put into the SNT? Also, what sorts of instructions should I provide to my other son who will be in charge of the trust?

A: The new rules relating to inherited IRAs generally require beneficiaries to distribute all benefits within 10 years of a person’s death. The old rules allowed beneficiaries to defer distributions over their life expectancies, which often meant decades of income tax deferral.

There are exceptions to the 10-year rule. One of the exceptions applies to an IRA which is payable to a properly drafted Special Needs Trust (SNT) which qualifies as a “see-through trust” according to IRS regulations. Distributions are allowed to be made over your son’s lifetime, and those distributions will be made to the SNT where they will not disqualify your son from Medicaid eligibility.

You should instruct your other son who is serving as trustee to meet with either an elder law attorney or an estate planning attorney after the two of you have died. If you have an attorney you trust, you should provide your son with that attorney’s contact information.

As trustee, your son needs to understand the purpose of the SNT, that it is designed to supplement but not support his brother. He also needs to understand what distributions can be made from the SNT without jeopardizing his brother’s eligibility for Medicaid. As trustee, he will also need to maintain proper records, file the appropriate tax returns, and prudently invest the trust funds.

The information in this column is intended to provide a general understanding of the law, not legal advice. Ronald Lipman of the Houston law firm Lipman & Associates is board-certified in estate planning and probate law by the Texas Board of Legal Specialization. Email questions to: stateyourcase@lipmanpc.com.