Asset protection

From Bogleheads

The purpose of this page is to describe and assess various asset protection strategies designed to mitigate the risk of financial ruin resulting from a lawsuit by an outside party.

Asset protection (sometimes also referred to as debtor-creditor law) is a set of legal techniques and a body of statutory and common law dealing with protecting assets of individuals and business entities from civil money judgments. The goal of all asset protection planning is to insulate assets from claims of creditors without concealment or tax evasion."

— Wikipedia[1]

Internal family matters, including divorce proceedings, are not addressed here.

The ethics of asset protection also are not addressed.


Insurance can be required by law, or be electively purchased, to provide protection from certain potential liabilities. In addition, the cash values that build up in whole life, universal, and variable universal life insurance policies can be subject to creditor claims.

Insurance for asset protection

The following types of insurance allow individuals to purchase protection from liability claims.

  • Auto insurance often covers both risks of property damage and needed medical care as a result of an incident involving a car. In most places, some degree of coverage is required by law in order to drive a car. Deductibles are usually available, and amounts and types of coverage are often highly customizable beyond the legally required minimum.[2]
  • Homeowner's insurance, renter's insurance, and landlord's insurance generally provide coverage for loss of one's own property and liability to others occurred because of their presence on your property. Deductibles are usually available. While a homeowner is paying off a mortgage on their house the lender will usually require homeowner's insurance, as may a buyer during the process of selling the house. There are always excluded perils, which means that if the loss is caused by one of those items then the insurance provides no coverage. There may be ways to cover these exclusions, either by riders amending the standard policy for an additional fee or by purchasing specialty insurance such as earthquake or flood insurance.
  • Professional insurance may take many names, depending on the profession, such as malpractice insurance or errors and omissions insurance. This insurance can protect the professional from paying directly for losses caused to their clients, and potentially others, by their work.
  • Umbrella insurance provides additional liability insurance above and beyond that contained in your other insurance policies. Umbrella insurance will generally need to be coordinated with the liability limits under those other policies.

Life insurance cash values

Federal bankruptcy law provides an exemption of $11,525 for the cash value of a life insurance policy in bankruptcy proceedings.[3] Additional liability protection against creditor claims to life insurance cash values is dependent on state law. In many cases it is also dependent on who is insured by the policy, who owns the policy cash values, and who is the beneficiary of the policy proceeds after the death of the insured. Some states protect all or a portion of the owner's cash value against creditors of the owner. Other states do not protect life insurance at all, or only protect proceeds that are paid to policy beneficiaries after the death of the insured.[4]

Splitting up assets between spouses

If one spouse has high risk of liability and the other spouse has a low risk of liability, it is often in both spouses' interest to title some assets in the low-liability-risk spouse's name.

Dr. Smith is a obstetrician. She worries about being sued. She is married to Mr. Smith. He is a stay-at-home dad who believes he is at low risk of being sued. Half of their assets are owned by Dr. Smith. The other half are owned by Mr. Smith. If Dr. Smith is sued in a common law state, the funds in Mr. Smith's name generally cannot be seized by creditors because they are owned by Mr. Smith, not Dr. Smith. By contrast, if the funds had been held in a joint account, all of the assets would have been exposed to creditors.

To reduce the risk of this being deemed a "fraudulent conveyance," the splitting up of assets should occur long before the high-liability-risk spouse is sued.

According to Modern Medicine, however, splitting up assets is not a viable strategy in all states:

Community property states

Shifting assets to a spouse may be in vain in states that have community-property laws, such as California and Texas. There, a married couple jointly owns all property acquired during the marriage, even if it's titled in only one spouse's name, although exceptions are made for gifts, bequests, and the like. Generally, a creditor of one spouse can pursue the entire value of community property to satisfy a judgment.

— Modern Medicine[5]

An accounting firm, Kosmatka Donnelly & Co., provides the following example:

Joe and Judy reside in a community property state. Judy owns a bicycle rental business (which exposes her to potential lawsuits); Joe is semi-retired. Each month they deposit a portion of their income into a brokerage account titled in Joe’s name. The account assets are subject to the claims of Judy’s creditors because the account is community property. The fact that the account is in Joe’s name has no effect in a community property state.[6]

Wikipedia states that there are nine community property states in the United States: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.[7]

According to the Modern Medicine article cited above, "[a] couple can beat [communty property laws] by signing a 'transmutation agreement' that converts jointly held property into separately held property."[5]

Robert F. Kuegler, author of A Guide to Asset Protection: How to Keep What's Legally Yours, elaborates:

A transmutation agreement signed by spouses in a community property state says, in effect: "This is my property. It's my separate property. You have no interest in my property because we choose not to be governed by community property. Ditto for your property. I have no interest in it because it's your separate property...."

— Robert F. Kuegler[8]

Note that splitting up assets does not provide any protection to assets that remain in the name of the high-liability-risk spouse. Also, tax consequences should be considered.[9] Finally, the implications of this strategy vis-a-vis divorce (both the risk of divorce and the fall-out in the event that divorce occurs) should be taken into account.

Investing in a primary residence

Homestead bankruptcy exemptions

Many states offer a "homestead exemption," meaning that a resident's principal residence is partially or fully exempt from creditors. Laws vary significantly from state to state.[10] Arkansas, Florida, Iowa, Kansas, Oklahoma, South Dakota, and Texas offer nearly unlimited homestead exemptions, subject to physical limits on the homeowner's acreage. In these states, a homeowner can shield millions of dollars from creditors via ownership of his or her primary residence.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 limits a person's ability to move from one state to another to take advantage of a superior homestead exemption. This limitation applies only to those who have declared bankruptcy. Specifically, the Act imposes a ...

... limitation of the state homestead exemption in bankruptcy to $125,000, regardless of state law providing for a larger or unlimited exemption. This limitation applies to homestead interests that are acquired within a 1215-day (40 months) period prior to the filing of the bankruptcy petition.

— Adkisson and Riser forum[11]

If one has violated the law, the limitation is $125,000 regardless of holding period.

Investing in a 401K

The Employee Retirement Income Security Act (ERISA) provides 401Ks and other ERISA-governed retirement plans with rock-solid protection from creditor judgments.[12] This protection applies to judgments including bankruptcy, and it applies in all 50 U.S. states.[13]

Individual Retirement Accounts (IRAs) don't receive those federal protections, although some states shield IRA assets from creditor judgments.

The language of the federal law governing rollover of assets from a 401K plan to an IRA is ambiguous. That law, the Bankruptcy Abuse Prevention and Consumer Protection Act, states that $1 million in IRA assets is protected in bankruptcy without regard to amounts attributable to rollover contributions.

According to the Wall Street Journal, "most experts say that phrase should be interpreted to mean that amounts rolled over from employer plans get creditor protection, as well. But others ... believe it means that the $1 million is determined 'without regard' to whether the amounts are attributable to rollovers."[12]

In short, maximizing contributions to a 401K plan is an excellent asset protection strategy; investors considering rolling over assets from a 401K plan to an IRA should carefully consider the asset protection implications.

Investing in a solo 401(k)

A solo 401(k) plan offers some level of asset protection but not to the same degree as a standard 401(k) plan, because a solo 401(k) is not technically subject to ERISA regulations and protections.[14]

Investing in an IRA

For anything other than a bankruptcy, protection of IRAs and Roth IRAs from creditors is determined by state law. Most states provide full protection. A list of state laws protecting IRAs is available here.[15]

At the federal level, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 provides traditional IRAs and Roth IRAs with an inflation-adjusted $1 million dollar cap exemption in federal bankruptcy proceedings. The act provides SEP and SIMPLE IRAs with a 100% exemption with no cap limit. Rollovers from employer plans have a 100% exemption with what most experts interpret to be no cap limit.[16] However, retirement plan assets can be tapped for family support and the division of property at divorce. These assessments are executed through a qualified domestic relations order (QDRO).[17] IRA assets can also be tapped through IRS federal tax liens.[18]

According to some attorneys with expertise in ERISA and pension topics, when rolling over assets from an ERISA plan into an IRA, you should title the IRA as such and not co-mingle it with ordinary contributions.[19] This can help with asset protection matters.

To make sure that an individual receives the full $1 million [bankruptcy] exemption on owner-established traditional and Roth IRAs and the unlimited exemption on IRA rollovers from tax-qualified retirement plans, it is good practice to establish separate IRA rollover and contributory IRA accounts. This will make it easier to track the separate pools of assets.

— Richard A. Naegele, J.D., M.A., Mark P. Altieri, J.D., LL.M., CPA/PFS, and Donald W. McFall Jr., CPA, MBA, Tax Adviser, published by the American Institute of CPAs[20]

See also:

Qualified domestic relations order (QDRO)

A QDRO is a judgment, decree or order for a retirement plan to pay child support, alimony or marital property rights to a spouse, former spouse, child or other dependent of a participant.[21]

A spouse or former spouse who receives QDRO benefits from a retirement plan reports the payments received as if he or she were a plan participant. The spouse or former spouse is allocated a share of the participant's cost (investment in the contract) equal to the cost times a fraction. The numerator of the fraction is the present value of the benefits payable to the spouse or former spouse. The denominator is the present value of all benefits payable to the participant.[21]

Employer retirement plans

A domestic relations order may assign some or all of a participant's retirement benefits to a spouse, former spouse, child, or other dependent to satisfy family support or marital property obligations if and only if the order is a "qualified domestic relations order." ERISA requires that each retirement plan pay benefits in accordance with the applicable requirements of any "qualified domestic relations order" that has been submitted to the plan administrator. The plan administrator's determinations on whether a domestic relations order is a QDRO, therefore, have significant implications for both the parties to a domestic relations proceeding and the plan.[22]


When the DRO relates to a pension plan trusteed by PBGC (Pension Benefit Guaranty Corporation), PBGC must review it to make sure it is in line with ERISA, the federal pension law, as well as PBGC policies. If it is, PBGC qualifies the DRO, and it becomes a qualified domestic relations order, or QDRO. PBGC will pay benefits as the QDRO directs.[23]

Investing in a 529 plan

At the federal level, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 shields from creditor's 529 plan 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).[24]

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.[24]

529 plans are easy and inexpensive to set up and maintain. The assets remain under the depositor's control. In some states the money deposited in a 529 plan is deductible from state income taxes.[25]

Investing in a variable annuity

State law determines the extent to which an annuity's cash value or income payments are subject to creditor claims. Many states offer no protection. Some states offer limited protection to cash values and/or the income streams from annuitizing the contract. A number of states do offer 100% exemption of annuity cash values from creditor claims. These states include Arizona, Florida, Hawaii. Maryland, Michigan, New Mexico, Oklahoma, and Texas. Two other states offer 100% exemption of cash values after a minimum holding period: Kansas (if held more than one year) and Louisiana (if held for more than nine months).[26] Variable annuity subaccounts are isolated from an insurer's general account, and are thus protected against a sponsoring insurer's creditors in the case of an insurance firm default.

Complex asset protection strategies

Forming a Limited Liability Company

A Limited Liability Company (LLC) is a legal form of business company offering limited liability to its owners. If a wealthy individual owns a business that is at high risk of liability, it is usually a good idea to transfer ownership of the business to a LLC. The purpose of doing so is to shield the individual's personal assets from lawsuit risk.

John has millions of dollars in stocks and bonds and owns a junk-hauling company in his own name. One of his drivers is injured on the job and sues John. Because the hauling company is owned by John, his personal assets are exposed. He loses everything. Ten years later, John starts a new hauling business. It is successful and John is able to save millions of dollars once again. This time the hauling business is owned by an LLC, which in turn is owned by John and a business partner. When a driver is injured, John's attorney argues in court that it is the LLC that owns the business; thus, John should be dropped from the lawsuit. If the judge agrees, then the injured driver can go after the assets owned by the LLC (trucks, for example) but not John's personal assets.

The problem with this strategy is that if the LLC appears to be sham rather than a bona fide business entity, a judge may allow litigants to bypass the LLC and go after the individual's personal assets.

Sue is a retiree. She has millions of dollars in liquid assets. Her gardener slips in her driveway and sues Sue for $10 million. Sue has titled her home in the name of an LLC. The LLC does not operate a for-profit business, does not have a bank account, does not have stationery, does not have a website, does not have bylaws or an operating agreement. The LLC has no employees and no revenue. Sue's attorney argues that because the accident occurred at the home, Sue's gardener can sue the LLC but cannot sue Sue as an individual. Unfortunately for Sue, the judge concludes that the LLC is Sue and Sue is the LLC. In other words, the LLC is not a real business. The judge allows the gardener to sue for both the assets owned by the LLC and the assets owned by Sue.

There are many factors that a judge may take into consideration when deciding whether a LLC is a sham entity. A complete discussion of such factors is beyond the scope of this Wiki, but in general the more the LLC looks and behaves like an independent, bona fide business, the better.

Even though the LLC strategy does not provide bulletproof asset protection, it certainly makes it more difficult for litigants to seize an individual's personal assets. By raising the costs of litigation and the cost of collection, LLC formation discourages potential litigants from suing in the first place. Forming an LLC is not very costly, making this a highly cost-effective strategy for individuals worried about liability risk arising from their business operations.

Irrevocable trusts

A trust is "a relationship whereby property (real or personal, tangible or intangible) is held by one party for the benefit of another."[27] The trust assets are managed for the beneficiaries by a trustee--either a person, such as a trusted friend, or an institution, such as Vanguard National Trust Company.

An irrevocable trust is a type of trust that can't be changed after the trust is set up. As N. Brian Caverly and Jordan S. Simon put it, "After you place property into an irrevocable trust, you can’t retrieve the property. For all intents and purposes, that property now belongs to the trust, not to you!"[28]

In contrast, a revocable trust allows you to revoke the rights of the trust; you control the assets. If you control the assets, your creditors can also control the assets. A revocable trust therefore provides no asset protection.[29]

From an asset protection perspective, transferring assets from yourself to an irrevocable trust is a good thing, because a creditor (usually) can't seize property that doesn't belong to you. Your family can be the beneficiaries of the irrevocable trust. So an irrevocable trust is a way to provide your family with financial support that is (usually) outside of the reach of creditors.

There are several significant drawbacks that should be borne in mind:

1. Setting up and maintaining a properly-designed irrevocable trust is expensive, requiring an estate attorney to set up the trust and an accountant to deal with gift, inheritance, and estate tax implications.
2. Income tax rates for undistributed income in irrevocable trusts are high:[30]
Over But not over The tax is: Of the amount over
$0 $2,450 15% $0
$2,450 $5,700 $367.50 + 25% $2,450
$5,700 $8,750 $1,180 + 28% $5,700
$8,750 $11,950 $2,034 + 33% $8,750
$11,950 ---- $3,090 + 39.6% $11,950
3. Normally, the irrevocable trust is irrevocable, meaning once you have deposited your money into it you cannot get it back even if your circumstances change.
4. If a judge determines that you put the money in the irrevocable trust simply to evade creditors, he or she has the authority to "clawback" the money (i.e. invalidate the trust).[31] This rarely occurs but is possible if, for example, the irrevocable trust is set up after you are sued.

Off-shore trusts

A Google search of "asset protection off-shore trusts" shows that off-shore trusts (trusts that hold assets in the name of a trust in a foreign jurisdiction) are recommended by numerous estate attorneys and asset protection consultants.

Most off-shore trusts are a type of self-settled spendthrift trust, i.e., a trust that an individual can establish himself for his own benefit, yet which purports to protect the trust's assets from creditors.[32] Self-settled spendthrift trusts are prohibited in most U.S. states. (But there are exceptions. See "Domestic asset protection trusts" section, below.[33])

According to their advocates, off-shore trusts keep assets “out of the reach of creditors” because U.S. judges “do not have jurisdiction over foreign citizens.”[34] Typically, the trustee of an off-shore trust is not a U.S. citizen and does not reside in the U.S. Moreover, the countries where off-shore trusts are often created, such as the Cook Islands, Nevis, and Isle of Man, “do not recognize judgments that originate in a foreign country, such as the United States.”[34]

Off-shore trusts, however, are expensive to set up and administer—typically costing tens of thousands of dollars up front plus annual fees of at least several thousand dollars per year. They also may complicate an individual's tax filings and can make it harder for the grantor/beneficiary to access his or her funds.

Most importantly, off-shore trusts are less ironclad than is generally assumed. Attorney Jay Adkisson, an asset protection specialist, points out that U.S. judges may give debtors a choice between surrendering their off-shore assets or going to jail:

Recent cases have recognized the power of courts to require debtors to bring their money back to the U.S. through what are known as ‘repatriation orders’. If the debtor does not comply with a repatriation order, a court may issue a bench warrant for contempt of court and hold you in contempt (and in jail) until the money does come back, or for many years. The record? It is 14 years in jail served by former corporate lawyer H. Beatty Chadwick who refused to repatriate money from overseas to pay alimony to his ex-wife.

— Forbes[35]

Domestic asset protection trusts

The flaws of off-shore trusts have led some estate planners to advocate domestic asset protection trusts. These are basically U.S. versions of off-shore trusts, i.e., self-settled spendthrift trusts. Although most states prohibit these types of trusts, a few states, including Alaska, Delaware, and Nevada, have begun allowing them. Such trusts are less expensive to set up and maintain than their off-shore counterparts. But both domestic asset protection trusts and off-shore trusts provide highly imperfect protection from creditors.

Most importantly, the trustee of a domestic asset protection trust resides in the U.S. and thus is under the jurisdiction of U.S. courts. Given that, the trustee may face a choice between going to prison or doing whatever a judge wants.[36]

Also, an individual who does not reside in one of the states that allows domestic asset protection trusts may not be able to persuade a judge that Alaska or Delaware or Nevada law should trump the laws of his or her own state. As the Asset Protection Corporation notes, "If you think you can get an Indiana judge to apply Alaska law in favor of an Indiana resident against an Indiana judgment held by an Indiana creditor which involves Indiana property? Well, you can just forget about that sort of thing happening."[36] Given that, domestic asset protection trusts appear to be better asset protection tools for those who live in one of the states that allows these trusts than for residents of other states.[37]

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.

See also


  1. Wikipedia
  2. State-by-State Minimum Requirements,
  3. Federal Bankruptcy Exemptions.
  4. State-By-State Main Creditor-Debtor Exemption Chart, Note 4 Riser and Adkisson forum. According to R&A the following states provide protection for 100% of life insurance cash values: Arizona, Florida, Hawaii, Kentucky, Maryland, Michigan, New Mexico, New York, Oklahoma, Texas, Vermont, and Wyoming. The following states provide 100% protection for life insurance cash values with qualifications regarding who (usually restricted to spouse and dependents) is the beneficiary of the policy: Alabama, Illinois, Indiana, Ohio, Oregon, Puerto Rico, Tennessee, Virginia, and Washington. Two states, Iowa and Kansas provide 100% protection of cash values with both beneficiary qualifications and, in addition, time restrictions applied to holding period.
  5. 5.0 5.1 Protect your assets before you're sued
  6. When Transferring Assets to a Low-risk Family Member Can Save the Day, Kosmatka Donnelly & Co.
  7. Community property, wikipedia
  8. A Guide to Asset Protection: How to Keep What's Legally Yours, Robert F. Kuegler, google books.
  9. For example, while splitting ownership of assets (via transmutation agreement) in community property states may reduce risk from creditors, it comes at the cost of the loss of complete step-up valuation treatment of assets held as community property: Step-Up In Basis.
  10. 50 State Homestead Exemptions & Other Bankruptcy Exemptions
  11. Homestead Exemption - Overview, Adkisson and Riser forum
  12. 12.0 12.1 How to Protect 401(k)s and IRAs From Creditors, Wall Street Journal, (May 9, 2009).
  13. "Retirement Plans and ERISA FAQs". U.S. Department of Labor. U.S. Department of Labor. Retrieved 30 Nov 2017.
  14. Solo 401K Asset Protection | Self Directed 401K | Solo 401K Creditor Protection | 401K Bankruptcy Protection | accessed 21 March 2015
  15. Naegele, Richard; Altieri, Mark (January 1, 2014). "Protection From Creditors for Retirement Plan Assets". The Tax Adviser. Retrieved September 25, 2016.
  16. Bankruptcy Protection For Your Accounts investopedia, Jan 23, 2008
  17. Chapter 9: Potential Claims Against Your Benefit (Divorce), ERISA, "What You Should Know About Your Retirement Plan". For more on QDROs, see QDROs: The Division of Retirement Benefits Through Qualified Domestic Relations Orders, ERISA
  18. Mark P. Altieri and Richard A. Naegele, Protect Retirement Assets: New bankruptcy legislation adds protections for retirement plans, Journal of Accountancy, January 2006
  19. 7 Reasons Not To Roll Your Orphan 401(k) To An IRA in Forbes magazine, 1/24/2013.
  20. Protection From Creditors for Retirement Plan Assets by Richard A. Naegele, J.D., M.A., Mark P. Altieri, J.D., LL.M., CPA/PFS, and Donald W. McFall Jr., CPA, MBA, in the Tax Adviser published by the American Institute of CPAs. January 2014
  21. 21.0 21.1 Retirement Topics - QDRO - Qualified Domestic Relations Order, from the IRS.
  22. QDROs: The Division of Retirement Benefits Through Qualified Domestic Relations Orders, from the U.S. Department of Labor
  23. [url=]Qualified Domestic Relations Orders and PBGC[/url], from the Pension Benefit Guaranty Corporation.
  24. 24.0 24.1 State Creditor Protections For 529 Plans: A SEED Working Paper, from Corporation for Enterprise Development
  25. State Tax Deductions for 529 Contributions,
  26. State-By-State Main Creditor-Debtor Exemption Chart Riser and Adkisson forum (note authors' disclaimers)
  27. Trust Law, Wikipedia
  28. Revocable versus Irrevocable Trusts,
  29. After the death of the grantor of a revocable living trust, the trust becomes irrevocable. If the trust contains spendthrift provisions, the trust can provide protection from creditors and spouses. These spendthrift provisions are common in credit shelter trusts (A-B living trusts or testamentary credit shelter trusts) and in trusts that provide for deferred distribution of trust assets for beneficiaries. See Adkisson and Riser Spendthrift Trust Overview and Spendthrift Trusts
  30. IRS Form 1041-ES Estimated Tax for Estates and Trusts
  31. Asset Protection Using an Irrevocable Trust?, Lodmill and Lodmill
  32. Lexicon of Asset Protection -- Complete List w/o Links, Riser and Adkisson forum, see "Self-Settled Spendthrift Trust", "Spendthrift Trusts"
  33. State-By-State Main Creditor-Debtor Exemption Chart Riser and Adkisson forum (note authors' disclaimers)
  34. 34.0 34.1 Offshore Trusts Provide Strong Asset Protection, from
  35. Ten Rules for Asset Protection Planning, Jay Adkisson, Forbes, (July 12, 2011)
  36. 36.0 36.1 Facts about Domestic Asset Protection Trusts (DAPTs), Asset Protection Corporation
  37. Easy Chart Regarding Effectiveness Of Asset Protection Trusts, Jay Adkisson, Forbes (November 15, 2011)

External links

Authors (and practitioners) Jay Adkisson and Chris Riser have a forum devoted to their book, Asset Protection: Concepts and Strategies for Protecting Your Wealth, which contains much useful information.

Forum discussions