Today's comment is by Mark Nestmann, our Wealth Preservation & Tax Consultant and President of The Nestmann Group.
Dear A-Letter Reader,
Do you know Joe – or Jane – Smith?
Joe is an average American guy. He lives in a three-bedroom home in the suburbs with a couple of children.
Joe has a solidly middle class occupation. So does his wife Jane – they both have to work to pay the bills.
Joe and Jane don't worry much about asset protection, privacy and have never invested a dime outside the United States. One day, they read an article that says more than 50,000 lawsuits are filed every day in the United States. But they ignore it, because they "know" there's nothing "average people" can do to protect their savings.
That's a glaring misconception. Joe and Jane, and almost every other "average American," can benefit from an integrated program of wealth protection, and protect their privacy to boot. And they don't need to spend a fortune to enjoy these benefits – either domestically or offshore.
"Free" Asset Protection in the United States
While the United States is a very "creditor-friendly" country, there are numerous opportunities for wealth preservation, particularly at the state level. These laws vary considerably state-to-state as to what assets are protected and under what conditions. If you live in a state with strong asset protection laws, they may provide an important first line of defense to protect your wealth. Here's a brief summary of what's available:
Liability Insurance: If you have a family, you should purchase liability insurance for your home and especially, your vehicles. Don't stop at the minimum limits, either. If you can purchase an "umbrella" policy with limits of US$1 million or more, do so.
However, liability insurance will not cover against intentional torts, such as libel, slander or harassment. This also doesn't cover punitive damages, or damages or injuries resulting from your violation of any law or regulation.
Homestead Laws: Most states have homestead laws. If your state has such a law, you won't lose your home, even if you lose a judgment or declare bankruptcy, as long as you own it or keep any mortgage current, up to whatever dollar limits are in effect. These limits are very low in some states with only US$5,000 or US$10,000 protected. Other limits are higher, but still unrealistically low. A few states, such as Texas and Florida, protect your home from the claims of creditors, with no limit to total value.
There are important limitations to homestead laws. Mortgages are exempt. In many states, so are criminal fines, punitive damages awards, and certain intentional wrongs such as deceit, fraud or libel.
State homestead laws also do not protect against federal, civil or criminal forfeiture proceedings, claims by the IRS or claims under federal bankruptcy provisions that make alimony, maintenance and child support non-dischargeable.
In addition, the 2005 Bankruptcy Reform Law limits the value of any state homestead exemption to US$125,000 if you have owned the residence for fewer than 1,215 days (three years and four months) before filing for bankruptcy.
Safety Vehicles for Your Hard-Earned Wealth
Life Insurance and Annuities: Almost every state protects the death benefit of a life insurance policy from creditors where a spouse or child is the beneficiary. However, the cash value of a life insurance policy may or may not be exempt. Similarly, stocks or other investments purchased through life insurance policies may or may not be protected from creditors.
Annuity payments are protected by most states. But the proceeds must generally be payable to someone other than the contract owner; such as your spouse or partner. Again, there are limitations. The protection may not extend to alimony or child support, criminal fines, punitive damages, or federal tax claims, among other possible exemptions.
Pension and Retirement Plans: Federal bankruptcy law exempts pensions, employer-sponsored retirement plans, Social Security and other benefits tied to age, illness or disability from attachment by creditors. But the protection exists only if you declare bankruptcy.
There is no limit on the amount that can be protected from bankruptcy in retirement funds, except that amounts accumulated in IRAs are limited to US$1 million.
There are important limits to this protection. The funds protected are the funds "reasonably necessary" for your support and your dependents' support. So protection for plans much larger than US$1 million may largely be misleading. Further, spousal and child support claims are not exempted. Nor are claims from the IRS. IRAs may also be seized in criminal forfeiture cases.
Domestic trusts: An irrevocable domestic trust can provide significant asset protection. The greatest protection is in a properly drafted irrevocable spendthrift discretionary trust , in which you're not named as a beneficiary. So long as the assets remain in trust, the creditors of your trust's beneficiaries can't reach them.
State legislators have created various exceptions to the spendthrift trust rule. Both the states and federal government may be able to attach a beneficiary's interest in a spendthrift trust to satisfy that beneficiary's tax obligations. Many states also provide exceptions for alimony or child support payments.
Avoid Fraudulent Conveyance
Creditors can challenge transfers of assets to a trust, partnership, insurance policy, etc. under state or federal fraudulent conveyance statutes. In a fraudulent conveyance suit, the burden of proof is on the creditor to demonstrate that the purpose of the transfer was to "hinder, delay, or defraud" its collection of an existing or known future obligation.
If you can't demonstrate a legitimate reason for the transfer, other than spiriting your assets away from your creditors, a court may set aside the transfer and order you to pay the money owed to a creditor. The court order may be reinforced with fines, foreclosures, seizure of substitute property, and occasionally, even civil contempt citations; i.e., pay the creditor or go to jail.
Finally: I can't stress this enough – it's absolutely critical that you obtain the advice of a qualified professional when transferring personal assets into any of the structures discussed in this article.
MARK NESTMANN,
Wealth Preservation & Tax Consultant President of The Nestmann Group
www.nestmann.com
NestmannBlog.SovereignSociety.com
P.S. Yes, in case you're wondering, the protection is much stronger and more private if you choose to use an offshore solution. Catch my next A-Letter comment in the coming weeks for how the Average Joe can protect his dough offshore.