If you don't properly protect your assets, they can potentially be lost in a lawsuit, bankruptcy, or to other creditor actions. It's important to understand the laws that can provide asset protection and to know what measures you can take to protect your savings.
Key Takeaways
- Asset protection is a part of financial planning that helps you keep your assets safe from creditors.
- Various investment accounts, such as individual retirement accounts (IRAs), carry a certain amount of asset protection in the interest of justice.
- Federal laws protect numerous retirement plans.
- Many states offer asset protection trusts that safeguard homesteads, annuities, and life insurance.
Why You Need Asset Protection
Having asset protection is critical to protecting your assets from creditors. There are many circ*mstances in which your assets can be attached or garnished by creditors, including if you file for bankruptcy, get a divorce, or are in a civil lawsuit.
It's important to consider these circ*mstances before they occur, If you don't protect your assets properly, you could lose them.
Asset Protection Caps for IRAs
Contributions and earnings in your traditional or Roth individual retirement accounts (IRAs) have an inflation-adjusted protection cap of $1 million against bankruptcy proceedings.
In addition, amounts rolled over from qualified plans, such as 403(b) and 457 plans, have unlimited protection. However, this protection only applies to bankruptcy, not to judgments awarded in other courts like if someone was injured due to your actions. Protection also does not include judgments for most domestic relations lawsuits, such as child support. In such cases, state law must be consulted to determine whether any protection exists and to what degree.
Many U.S. laws protect assets in the event of lawsuits, bankruptcies, and collection agency actions. You can also purchase an asset protection plan.
Qualified Retirement Plans
Assets in employer-sponsored plans have unlimited protection from bankruptcy, regardless of whether or not the plan is subject to the Employee Retirement Income Security Act (ERISA). This includes SEP IRAs, SIMPLE IRAs, defined-benefit and defined-contribution plans, 403(b) and 457 plans, and governmental or church plans under the Internal Revenue Service (IRS) code section 414. Amounts in your SEP IRA from regular IRA contributions are currently subject to a $1,512,350 limitation. This amount is adjusted for inflation every three years.
ERISA plans are also protected in all other cases, except under qualified domestic relations orders (QDRO)—where assets can be awarded to your former spouse or other alternate payees—and tax levies from the IRS. For this purpose, a qualified plan is not considered an ERISA plan if it covers only the business owner. The protection for owner-only plans is determined by state law.
Homesteads
Homestead exemption is a legal exemption in many states that protects a home from creditors following the death of a spouse or during bankruptcy.
The amount of protection you have for your home varies widely from state to state. Some states offer unlimited protection, others offer limited protection, and a few states provide no protection at all.
Annuities and Life Insurance
Asset protection for annuities and life insurance is determined by state law. Some protect the cash surrender values of life insurance policies and the proceeds of annuity contracts from attachment, garnishment, or legal process in favor of creditors.
Other states protect only the beneficiary's interest to the extent reasonably necessary for support. There are also states that do not provide any protection.
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How to Plan for Asset Protection
You can plan for asset protection in several ways. The key is to create as many obstacles as possible for creditors before they can legally claim rights to your property. Here are several ways to protect your assets.
Asset Protection Trusts
Several states, including Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming, allow asset protection trusts (APT), which are a type of irrevocable trust.
Asset protection trusts offer a way to transfer a portion of your assets into a trust run by an independent trustee. The trust's assets will be out of the reach of most creditors, and you can receive occasional distributions. These trusts may even allow you to shield the assets for your children.
The requirements for an asset protection trust are:
- It must be irrevocable.
- The trustee must be an individual located in the state, or a bank or trust company licensed in that state.
- It must only allow distributions at the trustee's discretion.
- It must have a spendthrift clause.
- Some or all of the trust's assets must be located in the trust's state.
- The trust's documents and administration must be in the state.
If you are considering an asset protection trust, consider working with an attorney who is experienced in this field. This way, you can ensure your trust meets regulatory requirements.
Accounts-Receivable Financing
If you own a business, you could borrow against its receivables and put the money into a non-business account. This would make the debt-encumbered asset less attractive to your creditors and make otherwise accessible assets untouchable.
Stripped-Out Equity
Another option for protecting your assets is to pull the equity out of them and put that cash into assets that your state protects. Suppose, for example, that you own an apartment building and are concerned about potential lawsuits. If you took out a loan against the building's equity, you could place the funds in a protected asset, such as an annuity (if annuities are sheltered from judgments in your state).
Family Limited Partnerships
Assets transferred into a family limited partnership (FLP) are exchanged for shares in the partnership.
Because the FLP owns the assets, the assets are protected from creditors under the Uniform Partnership Act (UPA). However, you control the FLP and thus the assets. There is no market for the shares you receive, so their value is significantly less than the value of the asset exchanged.
Other Asset Protection Strategies
Here are some other inexpensive, simple ways to protect your assets:
- Transfer assets to your spouse's name. However, transferring assets to your spouse could have consequences if you divorce.
- Put more money into your employer-sponsored retirement plan because it might have unlimited protection.
- Buy an umbrella insurance policy that protects you from personal injury claims above the standard coverage offered by your home and auto policies.
- Make the most of your state's laws regarding homesteads, annuities, and life insurance. Paying down your mortgage, for example, could protect cash.
- Don't mix business assets with personal assets. That way, if your company runs into a problem, your personal assets may not be at risk.
What Trust Is Best for Asset Protection?
An irrevocable trust like an asset protection trust can help keep your assets protected from creditors. An irrevocable trust is a trust that the grantor cannot change. It can also help your heirs avoid probate.
Can You Withdraw Money From an Irrevocable Trust?
An irrevocable trust is designed to restrict the grantor from changing it. Once you transfer money into the trust, you cannot remove it. If you are the trustee, you can make necessary withdrawals to cover expenses.
What Does an Umbrella Policy Not Cover?
An umbrella policy is an insurance policy that provides extended liability coverage, but it does not cover damage or destruction to your own property. It covers the cost of injury to another person or damage to their property.
The Bottom Line
If you are considering hiring an asset protection service, check with the Better Business Bureau (BBB) before deciding to use any of these services.Additionally, consider consulting with an attorney who is familiar with the laws of your state and who is an expert in asset protection.
