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Do I have to employ asset protection for all types of assets?

UPDATED: January 28, 2009

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Not all assets are treated in the same manner. Some assets are exempt from attack, while others need more protection. This differs from state to state, so find out the law in your state. For example, your bank account can be more easily attacked than the home you share with your spouse. Consider the difference between exempt and non-exempt property as you develop your asset protection plan.

Some examples of exempt property include:

(1) Public and private retirement benefits;

(2) Household furniture and furnishings;

(3) Personal effects, such as clothing and jewelry;

(4) Disability and health benefits;

(5) Proceeds of life insurance and annuity policies;

(6) Social security benefits; and

(7) Tools of a trade or business.

State law governs whether property is exempt or non-exempt from the claims of your creditors, and state law varies a great deal. Be sure you know which assets are protected in your state, so you can focus your asset protection plan on your other assets. When looking at your state law, be sure to check to see how much of an exemption is allowed for the particular type of property—it may be completely exempt, or exempt only up to a certain amount. For example, jewelry, heirlooms, and works of art may be exempt up to a specified amount, while 100% of the assets in your pension plan may be exempt, whatever the total.

Using the applicable exemptions, you and a knowledgeable attorney can structure your property holdings to turn non-exempt property into exempt property. For example, instead of putting cash into a bank account, you might decide instead to fund a retirement program or make improvements that increase the value of your home, if it is protected under a state homestead law.

Using the exemptions allowable under your state’s law is one of the most cost-effective techniques for asset protection. Unfortunately, exemptions alone are insufficient to protect many of your assets; more sophisticated techniques involving Trusts, insurance policies, investments, and new business structures may be required. In general, your creditors can only take property you own and control. There are ways to place property outside your control, temporarily or permanently. For example, if you are in a profession with a high risk of malpractice lawsuits, you might want to put money you now have in a bank account outside the reach of your creditors. You could do this by using the money to set up a Trust to pay for your children’s education. If you can’t take the money back until your children have completed their education, then your creditors can’t take it either. By the time your children have completed their education, you may be nearing or in retirement and will need the money left in the Trust for your retirement, and you will be much less likely to need protection from lawsuits at that point.

This is an area where you should seek legal advice at least to discuss your options, if not to set up your asset protection plan. There are often serious tax consequences involved in asset protection techniques, so you’ll want to know the possible consequences of all your options before you decide on the best plan for you.

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