Thoughts on Asset Protection
There are many ways to protect your assets from creditors. The key is thinking far in advance and structuring your assets to protect them, years before any creditor surfaces. Asset protection is much more difficult once there are creditors who may have rights to claim your activities are improper or fraudulent.
There is no single solution for every circumstance. A few strategies that a person should consider and some of their pros and cons are listed below. In some of these structures you may exercise management and control while in others your control may be very limited or nonexistent. Your needs are crucial to the choices you make.
Liability Insurance. Homeowners, auto, business, professional liability and umbrella coverages for potential known risks are a must.
Family Limited Liability Companies and Partnerships. These can be created to preserve and protect assets and impair a creditor’s access to your interests if structured properly. A charging order may be the only real remedy available to your later creditors.
401k or retirement plans. Assets you contribute to a retirement plan, including the growth thereon is exempt in bankruptcy. These can be great ways to shelter assets from creditors. Withdrawals may face a 10% early withdrawal penalty if made before age 59 ½. Amounts withdrawn would be includible in your taxable income if from traditional accounts. Similar rules apply to IRAs but they may only be protected up to $1 million, depending upon the circumstances.
Gifts. You can give assets to family members, such as your spouse, and remove those assets from the reach of your future creditors. Gifts can be made outright, in trust, or as part of an entity formation like a family limited liability company or family limited partnership. If to a spouse be thoughtful of the likelihood of discord that may lead to divorce before planning something that will be irrevocable.
Irrevocable Trust. An Irrevocable Trust can be used to protect assets from future creditors. In most states, you cannot be a beneficiary of such a trust and obtain asset protection. The assets transferred to such a trust are transferred irrevocably from you and you cannot get them back.
529 plans for your children. Assets deposited into a 529 plan for children, stepchildren, grandchildren, and step-grandchildren may be protected in bankruptcy up to the maximum amount allowed for a 529 plan in your state, as long as the assets were deposited more than 2 years before a bankruptcy filing. Investments options may be limited and there may be negative income tax consequences if the funds are not used for higher education.
To determine what methodologies are best for your situation you need to speak to an attorney who deals with all these options.