Asset protection planning consists of the process of placing your assets in such a way as to remove or decrease exposure to unforeseen liabilities or unexpected events. It is best to engage in such planning prior to the time at which a claim, lawsuit or judgment arises.
People often begin to address the issue of asset protection only after they are confronted with a pending claim, lawsuit or judgment. However, this could be perceived as fraud. If you engage in any type of behavior that could cause a delay in the collection of your assets by your creditors, you may be denied a discharge in bankruptcy, which could be the ideal form of protection in certain situations.
This type of planning is most effectively done along with estate, tax and other financial planning to permit an analysis of conflicting concerns. For instance, ownership of assets, such as real estate, may be beneficial for tax and estate planning objectives, but could have negative consequences with respect to asset protection. However, there are also cases in which such interests are in agreement.
One step you can take is to contribute the maximum amount to your retirement plans, most of which are not subject to creditors’ claims. These include 401(k)s, IRAs (up to $1,245,475 in 2016), and 529 savings plans.
If you are married, any real estate that you own with your spouse as tenants by the entirety with right of survivorship is not subject to either spouse’s creditor’s claims. The only exception is the IRS. This exemption is also applicable to several kinds of personal property. For example, it is advisable to title your joint bank and stock accounts as tenants by the entirety. However, this protection is inapplicable to any joint debts you may have.
In Virginia, new legislation became effective July 1, 2016 that provides an exemption from the claims of creditors, for the proceeds and other benefits from insurance policies and annuities. The new law could enable life insurance policies and annuities to become asset protection tools. However, there are restrictions on the assets if they are obtained with the objective of defrauding creditors or within six months of filing for bankruptcy.
If you have your own business, make sure that you use an entity that offers protection from personal liability, such as a corporation or LLC. In addition, transferring assets into specific types of trusts, including a Qualified Personal Residence Trust or a Qualified Terminable Interest Trust, can safeguard those assets from your creditors’ claims and help with estate planning.
Moreover, in certain situations, in Virginia, you can establish a trust for your own benefit using your own assets that will be exempt from creditors’ claims. It is called the Virginia Asset Protection Trust, which is also referred to as a “self-settled spendthrift trust.”