By Beau Ruff

We make money and we want to keep it. But, potential creditors are lurking around every corner. Perhaps it’s a professional malpractice claim. Perhaps it’s a divorce. Perhaps it’s a car accident. Perhaps it’s medical bills. Perhaps it’s a business lawsuit. How can you protect these assets so your nest egg isn’t cracked?

Beau Ruff,

This area of advice is generally considered asset protection strategies, and this column explores some of the most common ways we can legally engage in asset protection.

You’ll note that strategies such as hiding assets in an offshore bank account or hiding gold in the desert 10 feet under the ground are conspicuously absent from this list because purposely hiding assets is not a legal method of asset protection. The strategies listed below are legal. But, there is no magical method to completely protect every asset from every creditor.

Instead, the different strategies each have different levels of effectiveness, convenience and ease of implementation. So, what tricks and techniques can we legally employ to protect assets? Read on.

Retirement accounts

For many families, their house and retirement accounts make up the bulk of the value of their estate. Washington law generally provides that qualified retirement accounts and pensions are “exempt from execution, attachment, garnishment, or seizure by or under any legal process whatever.” RCW 6.15.020.

Accordingly, a simple asset protection strategy is to put more money into those retirement accounts that offer creditor protection.

For 2017, employee contribution limits on most employer retirement plans are capped at $18,000 (or $24,000 for those over 50 years old). The total allowed contribution to such a plan bumps up to $54,000 with employer contributions.

Insurance

Washington law generally provides the proceeds of disability insurance (RCW 48.18.400) and the proceeds from life insurance (RCW 48.18.410) are exempt from all liability for any debt of the beneficiary existing at the time the proceeds are available for use.  From inexpensive term insurance to more expensive whole life insurance (sometimes used in sophisticated estate planning), life insurance offers another option for protecting against not only an untimely death, but also potentially against creditors.

Additionally, insurance in the form of an umbrella policy can help provide asset protection. It is usually priced inexpensively and provides liability coverage above the limits of your other insurance policies, and it can cover things like injury, certain lawsuits and property damage.

Limited Liability Company

Washington law allows an assortment of entities that can protect your assets. For example, corporations, limited liability companies (LLCs) and limited partnerships all offer liability protection so long as corporate formalities are followed (i.e. it is a real business with a business purpose and business operations). The protection offered by an entity (like an LLC) is protection that, if there is liability against the entity, that liability does not reach assets owned outside the entity. Of course, the assets inside the entity are subject to those creditor claims. But, assets outside the entity are generally protected. As a general rule, all business operations and rental properties should be put into some kind of entity because of the liability protection offered.

Domestic Asset Protection Trust

Some states purport to offer Domestic Asset Protection Trusts (DAPT) which ostensibly protect your assets from creditors. States that have these types of statutorily-authorized trusts include Nevada, Alaska, South Dakota and others.

In Washington, we have very limited options for a person to set up their own trust (a so-called “self-settled” trust) and to claim asset protection for the assets owned by the trust.

As such, some planners turn to the DAPT friendly states, like Nevada, and establish the self-settled trust under the law of that state. The problem with this arrangement is that a Washington court is likely to apply its own laws to any controversy before the court and therefore would potentially allow a creditor to breach the protections offered by the other state.

Though it offers limited protection from this author’s point of view, it does create an additional hurdle for a creditor.

Bona fide gifting 

If you don’t mind giving up control, access, use and in any way reliance on your assets, then a bona fide gift could be an effective asset protection strategy so long as you are not making the transfer in violation of the Fraudulent Transfers Act of Washington under RCW 19.40.041 (essentially so long as you are not making the transfer in an attempt to outwit a creditor).

For example, federal law allows a person to gift up to $14,000 per year without any reporting requirements. Plus, neither the person giving the gift nor the recipient pays any tax associated with such a transfer.

If you are making routine annual gifts to a child (for example) and later become subject to a bankruptcy, it is unlikely those gifts could ever be brought back into the debtor’s estate to satisfy creditors. Not only does gifting provide potential creditor protection, it can also be structured to reduce or eliminate the estate tax.

Holistic planning

Though there is no magic method to protect your assets, by utilizing a mix of the strategies discussed above, an individual can maximize his or her asset protection.

The information presented in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal adviser.

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Attorney Beau Ruff works for Cornerstone Wealth Strategies, a full-service independent investment management and financial planning firm in Kennewick, where he focuses on assisting clients with comprehensive planning.