Four Investments Carry ‘Government’
Asset Protection -But with Limitations
Shane Flait, ©2009
your assets from unfair or unjust complaints is an
important part of financial and estate planning. But
before constructing a comprehensive asset protection
plan, you should know what protection the government
offers for 4 investment categories. Below, I
overview from whom you are – and are not- protected
and some limitations for these 4 investments
categories: qualified plans, life insurance,
annuities, and your homestead.
plans carry protection under bankruptcy
plans are the tax-advantaged plans whose rules are
regulated by the federal government. These plans are
geared to induce people to save a portion of their
working income for use during retirement. They
include all the defined-benefit and
defined-contribution employer retirement plans. I
include your IRAs – traditional or Roth versions –
with them, too.
carry federal protection against creditors under
bankruptcy. They don’t carry protection against
government tax claims or domestic relation claims
associated with divorce or child support.
employer retirement plans have unlimited creditor
protection in bankruptcy. Your personal IRA or Roth
IRA is protected but only up to $1 million dollars –
unless it was fully funded by a rollover from a
investment protections of these are regulated by the
state. But the amount and nature of the protection
varies with each state. So you need to check your
own state’s rules. Nevertheless you should be aware
of what the issues are for each investment.
plans – short of bankruptcy claims
For any legal action short of bankruptcy, your state
law determines how much protection your qualified
plan assets have. State laws vary on protection
inherited plans to beneficiary
Most states will exempt qualified plan assets but
only while they’re in the retirement account. Some
states, though, limit the exempt from creditor
actions. The limit may be $200,000 or what is
‘reasonably necessary’ to support the owner and his
or her dependents while satisfying some of the
creditors’ claims. Of course, the phrase ‘reasonably
necessary’ promotes litigation by claimants.
Your IRAs can be vulnerable. Depending on how must
protection your state gives to individual IRAs, your
assets may be better off in your company plan than
rolled over into your IRA.
insurance and Annuity Protection
are regulated by your state’s laws. Some will
protect the cash surrender value of life insurance
as well as annuity payments from creditor claims.
Other states will restrict protection only for a
beneficiary’s interest necessary for his support.
As an example, those states with good asset
protection protect the owner's cash value against
creditors of the owner. Bad states will either not
protect the life insurance at all, or just protect
proceeds that are paid to beneficiaries when the
insured dies. In the latter case, the beneficiary
really has little protection since the creditor can
gut the cash value of the contract leaving little or
nothing for the beneficiary.
Likewise, exemptions for annuities don’t always
protect the owner's cash value in the annuity. So,
to benefit by the exemption, the owner has to
annuitize the annuity and start taking payments.
Also if there’s a state exemption allowing annuity
payments for your "support", beware that this may
leave you with a very small amount.
The extent to
which your homestead – i.e. your main living
residence- is protected is determined by your
state’s Homestead Act; and this varies greatly among
the states. So you’ll need to check out your state’s
Realize that your vacation or second home isn’t
protected by a state homestead exemption. And a
homestead exemption doesn’t protect you from a
federal tax lien.
An estate planning conflict with
for state exemptions to protect you, the protected
asset must be held in your own name. But then,
those assets are trapped in your estate for purposes
of federal estate taxes. And for large estates, the
federal estate taxes can take up to 55% of the value
of those assets.
So the wealthy should forget about state exemptions in favour of
transferring their assets to trusts or other
entities for the benefit of their heirs. These
devices may be better for protecting them from
future creditors as well as the ravages of federal
you’ll find very little or no protection under
government exemptions for claims against you for
taxes and domestic relations orders – such as child
support. Such claims affect the majority of people.
Nevertheless these 4 investment categories above can
be helpful in your asset protection program for some
of your assets.
Shane Flait is a writer and educator. Get more info