Asset protection

The purpose of this page is to describe and assess various asset protection strategies.

Splitting up assets between spouses
If one spouse has high risk of liability, it is often prudent to title some assets in the other spouse's name. To reduce the risk of this being deemed a "fraudulent conveyance," the splitting up of assets should occur long before the more-vulnerable spouse is sued.

According to Klueger & Stein LLP, "In common law states ... [c]reditors of the debtor spouse cannot reach the separate property of the non-debtor spouse, with the limited exception for necessities of life."

Example: Dr. Smith is a obstetrician. He is married to Mrs. Smith. Half of their mutual funds are owned by Mrs. Smith. If Dr. Smith is sued in a common law state, the funds in Mrs. Smith's name generally cannot be seized by creditors because they are owned by Mrs. Smith, not Dr. Smith.

Admittedly, this strategy does not provide absolute protection to the assets of the less-vulnerable spouse. . Also, tax consequences and the effect on divorce proceedings should be taken into account. On the other hand, it is a no- or low-cost strategy that can be implemented without professional legal assistance and provides significant asset protection to the less-vulnerable spouse.

Investing in a 529 plan
At the federal level, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 shields from creditors 529 assets owned by a bankrupt beneficiary, provided the deposits meet certain criteria (for example, the deposits must have been made at least two years prior to bankruptcy).

Many state laws provide protections as well, and unlike the federal legislation, the state-level protections apply to claims brought outside the bankruptcy process. For example, the following states provide creditor protection to both owners and beneficiaries of 529 plan assets: Alaska, Arkansas, Colorado, Florida, Kansas, Kentucky, Maine, North Dakota, Pennsylvania, South Dakota, Virginia, and West Virginia.

Living life carefully
Perhaps the most effective asset protection strategy is to try to steer clear of activities that create liability. This means driving carefully, avoiding barroom brawls, and not owning a dangerous dog. It also means being discreet about one's assets so as to avoid interest from would-be litigants.