How to Legally Protect Assets From Creditor Claims

by Tom Streissguth
Banks must obey court-ordered garnishments and levies against customer accounts.

Banks must obey court-ordered garnishments and levies against customer accounts.

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In a lawsuit-happy society, protecting assets from potential claims is a smart financial step. There are several methods of exempting assets, such as setting up a limited liability company, or a domestic or foreign trust. It's important to remember the laws against fraudulent conveyance, which prohibit hiding property to protect it from a claim that's already been filed. The IRS and other government agencies will also take action against suspected tax evasion or money laundering.

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Illegal Conveyances

If a claim has been filed against you by a creditor, it's likely too late to set up any asset protection. A judgment can be enforced against property that is non-exempt -- meaning the law does not protect it from creditors. Under some conditions, a court can also allow a levy, garnishment or seizure of assets which, by the strict letter of the law, should be off-limits. If you're charged with fraudulent conveyance, for example, the court can move assets into the non-exempt category. In addition, a business or individual may be ordered to surrender money, investments, real estate and other assets that you transferred after the cause of action in the claim arose.

Life Insurance and Retirement Savings

One method of sheltering assets is to buy an insurance policy and make members of your immediate family the beneficiaries. Most state laws will exempt the proceeds of insurance policies from creditor claims; others only exempt insurance paid for the benefit of your family. Alternatively, you can place cash in a qualified retirement plan, such as a 401(k) or an individual retirement account. When it comes to enforcing judgments, most states partially exempt these accounts. In California, for example, retirement accounts are available for the payment of back child support but are exempt to the extent necessary so the debtor can still support himself.

Home Sweet Homestead

Investing in a home can protect a significant chunk of personal change, as long as you can designate that property as your principal residence or homestead. The key factor is the exemption amount that would apply to the home. Each state sets this judgment exemption figure; South Carolina exempts $50,000 of your equity in a homestead while Florida exempts a homestead completely from all creditors except a lender that has a secured loan on the property.

Getting Down to Business

Starting or investing in a business can also put your assets out of reach of the law's long arms. In some business structures, such as a limited liability corporation, the partners or members in the business are generally protected from claims against the business. By investing capital or transferring income-producing assets to the business, you've also put it out of the reach of any claims against you personally. There are exceptions, of course; you can be held personally liable for any loans you've personally guaranteed for the business, and you could be liable for any "fraudulent conveyances." In addition, a court's "charging order" may allow a creditor to levy on any distributions or income owed to you by the LLC.

A Matter of Trust

A trust is a structure that allows a grantor to place assets under the control of a trustee and for the use of a beneficiary. A trust created in the U.S. is subject to U.S. laws; a court may allow a creditor access to it. But an international "asset protection" trust, set up in a foreign country, puts assets out of the way of U.S. law and requires the trustee to comply with local rules and regulations. Nevertheless, U.S. law still requires you to declare any income received from the trust; you must also disclose an offshore trust when it's created. Tax evasion, money laundering, fraud and other illegal activities may also subject a trust to seizure by the local authorities, no matter where the trust is set up.