:max_bytes(150000):strip_icc()/buildawall.asp_Final-a5c4a02c9bf94fef9d648d7439cf0749.png)
George Lambert has spent 30+ years in the financial industry; his roles include CFP, certified divorce financial analyst, and FINRA arbitrator.
Updated April 11, 2024 Reviewed by Reviewed by Erika RasureErika Rasure is globally-recognized as a leading consumer economics subject matter expert, researcher, and educator. She is a financial therapist and transformational coach, with a special interest in helping women learn how to invest.
Part of the Series BankruptcyTypes of Bankruptcy
Bankruptcy: Your Legal Rights
Bankruptcy Terms (341/A-B)
Bankrupty Terms (C-I )
Bankrupty Terms (J-Z)
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.
Having asset protection is critical to protecting your assets from creditors. There are many circumstances 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 circumstances before they occur, If you don't protect your assets properly, you could lose them.
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.
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.
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.
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.
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.
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:
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.
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.
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).
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.
Here are some other inexpensive, simple ways to protect your assets:
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.
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.
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.
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.
