By: Justin M. Kennedy, Associate Attorney
Litherland, Kennedy & Associates, APC, Attorneys at Law
If you are concerned that you may be sued in the future, you may want to consider ways of protecting your assets. As a Trustor, many asset protection strategies may not available to you, however, you have the ability to give the beneficiaries under your trust asset protection. The asset protection to the trust beneficiaries would protect their inheritance from the beneficiaries’ creditors.
There may be ways to achieve partial protection of your assets from your own creditors. All of these strategies require planning in advance of any creditor claims and may be voided if you attempt the strategy after you are aware of the creditor.
Umbrella insurance policies may protect your assets from liability to your creditors. You would want to talk with an insurance agent about the protections and limitations of such policies.
Holding a rental property in a Limit Liability Company (LLC) may protect your non-LLC assets from a creditor of the LLC. For example, if you own two houses, one is the home that you live in and the other is a property that you rent. If you put the rental property in a LLC and someone is injured in the rental property, that injured person could seek damages against the assets held by the LLC (the rental property) but your home may be protected. However, if the person was injured in your home, the injured person could seek damages against both your home and your interest in the LLC (the rental property).
Qualified ERISA (Employee Retirement Income Security Act of 1974) retirement plans are exempt from bankruptcy, regardless of value. IRAs are exempt to $1,000,000 (indexed for inflation). Please note that inherited IRAs are not exempt.
529 Plans have many protections under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). You may create a 529 account for each of your children, step-children, grandchildren, or step-grandchildren (beneficiary). Contributions to the 529 accounts must be made over two (2) years prior to the filing of bankruptcy for the following protections to apply.
Under California law, you may fund a 529 account up to $475,000 per beneficiary. You would still be able to keep control of the management/investment of that money. To fund a 529 account, in a single year you may give $70,000 per beneficiary using annual exclusions from the federal gift tax.
The money held in a 529 account is to be used for the education of the beneficiary. If the money in the 529 account is used for the education of the beneficiary, the money is tax free. Any money taken out from the 529 for non-education use is subject to a 10% penalty, plus the taxes on the earnings.
If you have funded the 529 account less than two (2) years ago but more than one (1) year ago, then $5,000 per beneficiary would be exempt from bankruptcy. If you funded the 529 account less than one (1) year ago, the full amount in the 529 account would be subject to the bankruptcy.
- Reasons an Estate Plan Could Be Challenged: Part 1 – Formal Requirements - January 24, 2020
- Estate Tax Exemption Amounts to Increase - November 6, 2019
- Beneficiary Designations, etc., Aren’t a True Substitute for a Trust - March 6, 2019