Can u Keep it?
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Unfavorable Trusts
Favorable Trusts
Divorce Protection
Exempt Assets
Equity Separation
Qualified Plans

  Exempt Assets


Along with creating thoughtful business entities and trust mechanisms protected with insurance and prenuptial agreements, a comprehensive asset protection plan is sure to leverage assets that are exempt from liabilities. By taking advantage of the allowed exempt assets, a wealth holder can reduce the size of his estate and make fewer assets available to creditors.
One of the first places to start when looking at an asset protection plan is to identify which assets are exempt and which are not. This section covers a few of these assets.
One of the most difficult aspects of asset protection planning is dealing with property ownership. Sometimes, a trade off is necessary. To secure great asset protection, you must lose some of the tax benefits achieved in sole property ownership.
One thing you cannot do is allow the tax tail to wag the dog. Consider that some homeowners can create a corporation, and transfer their home into the corporation’s name in an attempt to protect the home and its equity from creditors. Upon the sale of the home, income taxes are now due at the corporate level, and again when distributed. On the opposite end of the spectrum, a homeowner can own a property outright and refuse to refinance because he does not receive a tax deduction on the interest. But if this homeowner finds himself subject to creditors, he might lose the equity in the home.
From an asset protection stance, knowing a few of the various forms of property ownership—tenancy by the entirety, tenants in common, and joint tenants—can help you make decisions that might protect your assets.
Tenancy by the entirety (TE) is a form of ownership allowed only to husbands and wives. Each spouse has the ability to own the property after the death of the other. TE-titled property is nearly impenetrable by the claims of either spouse. Each spouse’s creditors can force the partition of the property.
Currently, eighteen jurisdictions[1] recognize TE as a valid way to own real property. These jurisdictions are Delaware, Florida, Illinois, District of Columbia, Hawaii, Indiana, Maryland, Massachusetts, Michigan, Pennsylvania, Rhode Island, New Jersey, North Carolina, Ohio, Tennessee, Virginia, Vermont, and Wyoming.
Case Study
Assume Alan (a business owner) and Aleksandra (a homemaker) live is a state that recognizes tenancy by the entirety. In 2005, as joint tenants, they purchase a commercial building valued at $10 million. In 2007, they meet with an asset protection expert who recommends they re-title the building as TE. As a result of this transfer, they would enjoy the following benefits:
·         Each spouse would have an undivided interest in the building.
·         The creditors individually would not be able to force the distribution while married.
·         At death the surviving spouse would take full ownership of the building.
·         Upon individual bankruptcy, the building would be secure from creditors.
They would, however, have some drawbacks:
·         Each spouse loses the ability to convey the property to anyone else.
·         Upon the death of one of the spouses, the building is owned by the surviving spouse and would be subject to his or her creditors.
·         On a joint bankruptcy, the building would be subject to the creditors.
Assume the building was purchased in 1990 and was separate property of Alan when he married Aleksandra. Now in 2007, they are looking to re-title the property as TE property. This could pose the following problems:
·         It would lose its separate property status.
·         Upon divorce, Alan would lose some of the building value to Aleksandra.
·         If Alan dies first, Aleksandra would secure full control of the property, meaning Alan’s first son from his previous marriage might be unintentionally excluded from ownership.
·         If the property was subject to prenuptial agreement, it would be removed from the agreement and considered joint property in many jurisdictions. 
Tenants in common is a form of concurrent ownership in which each tenant holds a separate interest in the property and has the right to keep, enjoy, and pass ownership to any of the other tenants. We spend little time on tenants in common because it is of little use for asset protection planning. If your ownership in property is freely assignable, it can be assigned to creditors.
Case Study
Several years ago, Alan Whitmore owned a $3 million building outright, which meant the building’s full value was available to his creditors. When Alan embarked on the asset planning venture, he realized if he were to convert his ownership to tenants in common with three of his children, his potential exposure to creditors would be limited to 25 percent of the value of the building.
If Alan loses a judgment for $3,000,000, his potential loss from this property would be $750,000 so long as the tenants in common agreement included ban on partition of property.
Though similar to tenants in common, joint tenancy differs in that an exception is made death. Joint tenant interest transfers to the other tenants. Interests cannot be transferred to heirs through wills and trusts. Before death, the interests are freely transferable, so joint tenancy provides limited protection from an asset protection standpoint. If interests are transferred to another person (or creditor), the original partners retain their joint tenant status with each other, but they become tenants in common with the new owner (or creditor).
Case Study
Alan Whitmore considers joint tenancy with his three children on his $3 million building. If Alan loses a judgment for $3 million, his children would continue to own the property as joint tenants with each other, but the creditor would become tenant in common.  As with all forms of co-ownership, it is important to examine the use of an agreement to prevent a partition or judicial foreclosure of the property.
Homestead Exemptions
Almost every state has enacted some form of homestead exemption. These exemptions list the types of assets that are outside the reach of creditors.
In the past, homestead exemptions referred only to real property, but over the years, states have added other items to their lists. The list of exempt assets can range from entire home value (Florida) to the ability to keep two goats, $100 worth of tools, and a sewing machine (Massachusetts).
When most planners refer to homestead exemptions, they are referring to the equity in the home. Forty-four states currently allow some amount of equity to be retained by the homeowner in the event of lawsuit. Although these states have homestead exemptions on primary residences, the amount exempt varies widely.
It has been widely speculated the homestead exemption was a contributing factor to O.J. Simpson’s relocation to Florida. In 1999, Simpson moved from California (where the exemption for real estate is $50,000) to Florida (where his entire residence was protected). When he lost the civil judgment to the Goldman family, the family was unable to attach the home. For years, Simpson lived in comfort while the Goldman’s waited for their judgment. 
Note, that this is not an endorsement of Simpson’s behaviors, but rather an example of the strength of homesteading laws. And fortunately, is no longer possible for the likes of Simpson to move to another state and protect all equity. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 addressed misuses of homesteading laws by limiting homesteading to $125,000 in a bankruptcy proceeding. To protect an entire residence from bankruptcy, a tenant must have acquired the property 1,215 days prior to bankruptcy.
Appendix B provides a listing of each jurisdiction’s exemption amount.
Important to note is that not all creditors are subject to the homestead exemption. Generally speaking, IRS tax liens, child support, and divorce settlements are not protected by homestead exemptions. 
Case Study
Alan and Aleksandra live in a state that has homestead protection on the entire primary residence and all improvements. In 2007 while completing their asset protection planning, the home was valued at $5,000,000. If they were to lose a judgment for $5,000,000, the entire home would be protected.
California generally exempts only the first $50,000 of a person’s home (though certain criteria bump this to $75,000 or $150,000).[2] If a home exceeds the value of the exemption, courts have devised remedies for creditors. If it is possible to partition the property, the court may allow the debtor to retain the amount approximating the exemption and the remainder can be subject to the creditors. Most of the time this is not possible, so a court often will force the sale of the home, and the proceeds in excess of the exempt amount are available to creditors[3].
Case Study
Deborah Whitmore, Alan’s first wife, lives in California. Because she is over 65, she qualifies for the highest exemption: $150,000.  Deborah loses a lawsuit and owes $1,000,000. Her home is worth $1,000,000. If no equitable arrangement could be found, the courts could force the sale of the property, leave Deborah with $150,000, and use any of the remaining proceeds to settle the claim. 

In an attempt to protect the American worker, Congress passed the Employee Retirement Income Security Act of 1974. Section 29 U.S.C. § 1056(d)(1), commonly known as the “ERISA Anti-Alienation Provision,” states that "[e]ach pension plan shall provide that benefits provided under the plan may not be assigned or alienated.” With the passing of that law, retirement accounts are afforded a significant amount of asset protection, including exemption from bankruptcy and creditors of legal actions. Consequently, retirement accounts make up a large part of wealth-holders’ nest eggs.
We use qualified plans routinely in our practice with clients when they have a desire to move money outside their business, take large deductions, and shield it from creditors.
Case Study
Alan Whitmore owns a manufacturing company, and for twenty years he has been contributing $40,000 per annum to the company profit-sharing plan. With growth, the account is worth more than $2,000,000.
If Alan loses a judgment for $10,000,000, the creditor would not be entitled to any of the money in the profit-sharing plan to settle his debts. The creditor would be entitled only to money distributed from the fund to Alan at retirement.
When Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, not all qualified plans received equal treatment. The law limited the amount that can be exempt from creditors for traditional and Roth IRAs to $1,000,000. Creditors can seize amounts in excess of this.
This limit, however, does not apply to IRA accounts that were a result of a rollover from another qualified plan. For instance, the limitation does not apply to money in a qualified plan not held in a traditional or Roth IRA. For example, a $1,000,000 regular contributory IRA (that was not a result of a roll-over from another ERISA qualified plan) is safe from creditors, as is a $2,000,000 company profit-sharing plan.
As well, a profit-sharing plan rolled over to a separate IRA would retain its asset protection features.
Spouses, children, and dependants can reach qualified plans. Using the Qualified Domestic Relations Order (QDRO), a spouse or ex-spouse can take his or her share of the plan and roll it over to the spouse or ex-spouse’s own qualified plan or IRA. The courts can also use qualified plans for alimony and child support payments. As such, a qualified plan is not at the top of the list for mitigating risk from marriage.
Historically, many states have provided life insurance and annuities with strong asset protection as a means of protecting and providing for widows and orphans. But these tools have evolved into powerful vehicles for wealth holders to accumulate assets and protect wealth.
When we think about life insurance, most people think of one of two kinds of insurance: term insurance or whole life.
Term insurance provides death benefit for a stated time period (or term). Term insurance was initially designed to provide large death benefits for people on a limited budget. Because of its short time frame, it is well suited to provide death benefits while raising kids or to cover business loans.
While term insurance is designed to provide protection for a specified time period, whole life insurance is designed to provide coverage for an entire lifetime. Since it must provide insurance for the whole life, the companies charge policyholders a premium in excess of the death benefit in the early years, warehouse these funds in a reserve (cash value), and pull from these funds in the later years when the cost of the insurance exceeds the premiums being charged. This keeps the premiums level throughout the lifetime.
These policies, often called cash value life insurance, generate a savings element. Cash values of the policies are critical to the design of this insurance. Depending on the design, some policies build cash slowly and others can be designed to have cash almost equal to the premiums paid on the policy.
A wealth holder can use life insurance to accomplish creditor protection in several ways. Many jurisdictions have provisions to protect the cash value inside of the policies. A wealth holder might also make an irrevocable beneficiary designation to the policy. If the client lives in a state with limited legislative protection for life insurance, we often design and place “high cash value” (policies where the cash value is equal to or greater than the premiums contributed) inside of a wealth protection limited partnership. This makes the assets available if needed, but largely unassailable to creditors. At the death of the insured, the beneficiary is often a trust that prevents the creditors from any claim on the money.
Annuities are insurance contracts that provide income to a beneficiary. Written by life insurance companies, annuities can be viewed as the opposite of life insurance. Instead of the insurance company paying the beneficiary at death, they pay the beneficiary while the policyholder is alive. Annuities come in two broad forms: deferred annuities and single premium immediate annuities.
Deferred annuities work like this: The policyholder pays the premiums, which accumulate interest. Payments are deferred to some future date. Once the installment payout begins, the insurance company uses the policyholder’s age and the amount in the cash value of the annuity to determine the amount of each payout to the policyholder.
Many different types of deferred annuities exist, as do the many different methods to accumulate the cash inside of the policy. These largely depend on the client’s risk tolerance. Some can be invested in fixed accounts, some invest in the stock market and most recently, annuities are invested in some index with a minimum guarantee and a maximum interest rate. If the policyholder dies before their annuitization date and no annuity payments have been made, the company will pay the cash value as of the date of death.
As its name implies, single premium immediate annuities require a single premium payment. The policyholder immediately receives payments as long as he or she lives. Many people choose these annuities at retirement to guarantee a stream of income they can never outlive.
Since payments cease upon the policyholder’s death, many elect to have the annuity company payout money based on the policyholders’ life expectancy, with some fixed timeframe guaranteed. This is known as a period-certain annuity. If your guaranteed payment period is ten years, and you die before collecting for ten years, your beneficiary would continue to receive the payments for the entire ten years.
A chart listing the various exempt annuity amounts by state is listed in Appendix C.


[1] Many differences exist between individual state’s laws regarding TE structures and ownerships. Consult with a licensed attorney in your state to discuss the treatment of TE issues.
[2]California Code of Civil Procedure 704.730 describes all of the amounts and exclusions to this exemption.
[3] To protect the additional equity in the home.
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