All of a person’s various assets (such as cars, jewelry, and homes) are not always treated in the same manner. Some assets may be exempt or protected from attack by future creditors, while others require more specific protection.
For example, your bank account can often be more easily seized by creditors than the home you share with your spouse. Due to these aspects, it is highly necessary to consider the difference between exempt and nonexempt property when developing your asset protection plan.
Which Types of Assets are Typically Exempt from Attack By Future Creditors?
State law generally governs whether a property is exempt or nonexempt. Each state may have its own laws when it comes to exempt assets and creditor protection. Some typical examples of exempt property include:
- Public and private retirement benefits;
- Household furniture and furnishings;
- Personal items, such as clothing and jewelry;
- Disability and health benefits;
- Proceeds of various types of life insurance and annuity policies;
- Social security benefits;
- Tools of a trade or business.
Thus, these assets are usually exempt from attack by creditors. That is, if a person owes a creditor debt, the creditor generally cannot seek to collect exempt items like the ones above as a means of payment for the debt.
What is an Asset Protection Trust?
Besides understanding the differences between exempt and nonexempt property, another way to protect your assets is to use various financial tools and instruments. One of these is known as an “asset protection trust”.
An asset protection trust is a type of trust that allows property to be held in a trust by a trustee, which will then be transferred to a recipient, known as a beneficiary. The trust property is released at the discretion of the trustee (that is, under their terms and conditions. As a result, such a trust is also sometimes called a discretionary trust.
Asset protection trusts can:
- Help provide a greater amount of control over the property distributions;
- Protect against waste by the recipient;
- Help maintain records of the property distributions; and
- Provide various tax benefits.
Thus, an asset protection trust is one way to provide more security and control over one’s assets. This can in turn help reduce some of the “mess” and disorganization that sometimes occurs during a bankruptcy or creditor dispute.
What are Some Other Ways to Protect Assets from Creditors?
There are various other ways to protect your assets from creditors. These can include various techniques and mechanisms, including:
- Gifts of Property: Gifting your property can remove the assets from your listed estate. This may reduce the potential of attack from creditors. For instance, if you transfer a plot of land to your child, creditors might no longer be able to try and reach it;
- Retirement Plans: These can provide additional financial security in the event of future debt, emergencies, or other unplanned situations;
- Insurance: Purchasing and maintaining insurance is an effective way to reduce your personal risk. Rather than you bearing certain risks (such as those associated with accidents or property damage), the risk is transferred to an insurance company. This can also provide additional documentation for your assets and property;
- Doing Business as a Corporation: Conducting business as a corporation can often provide protection against certain liabilities. For instance, if members of a corporation are sued in connection with the business, creditors generally can only go after the corporation’s assets, not the assets of the individual corporation members.
- Other forms of business may offer similar protections, such as limited liability corporations (LLCs), limited partnerships, and other business forms.
Is it Possible to Negotiate with a Creditor?
If various forms of asset protection fail or are not adequate, it can still be possible to negotiate with a creditor in many instances. Some aspects that might help you during negotiations may include:
- Cash: If you can prove that you have cash on hand, the creditor might be more willing to work out a repayment plan with you. This is because they may perceive you as being a less “risky” customer, since you have cash that can be used for the payments.
- Amount Owed: If the amount owed to the creditor is not that large, they may not want to waste their time and resources trying to obtain it from you in full.
- They may be willing to change some of the terms of the debt and allow you to pay it back in a way that works better for you (for instance, in different monthly installment amounts).
- How Old is the Debt: In some cases, creditors are unwilling to spend lots of time trying to collect on a debt. This is because it can sometimes take years before they can receive any of the debt amounts.
- If you can show that you have a quicker solution, such as paying off some of the debt immediately, they may be willing to work with you in the long run.
Do I Need an Attorney to Create a Plan to Protect My Assets?
Using the applicable exemptions, you and a knowledgeable attorney can structure your property and assets to turn nonexempt property into exempt property. For example, instead of putting cash into a bank account, you might decide instead to fund a retirement program, which is more protected than bare cash amounts.
Using the allowable exemptions is one of the most cost effective and direct techniques for asset protection; however, exemptions alone are often not sufficient to protect many of your assets. More sophisticated techniques and methods may be required, which is something that an experienced wills, trusts, and estates lawyer can help you with.