May 28, 2017

Asset Planning & Protection

Asset planning refers to either placing assets beyond the reach of creditors, or making the process of reaching assets so difficult for creditors that it will deter collection efforts, or some combination of the two.

People who never imagined themselves in financial difficulty now see its specter looming on the horizon. They want protection, and they want it now.

If you consult with an attorney or planning professional before you have significant debt, or while you’re solvent, assets can be moved without concern. Unfortunately, I usually see clients when they have incurred significant debt – usually either from business obligations or questionable investments.

While I offer general information here, it is not comprehensive and not intended as legal advice.

Exempt property: hands off, creditors

The most easily understood form of asset planning is claiming exempt property.  I typically refer to property that creditors cannot reach as exempt property. Exempt property for North Carolina residents is set out in North Carolina General Statutes §1C-1601(a).

The most commonly applicable exemptions in North Carolina:

  • $3,500 in an automobile
  • $35,000 homestead exemption (note: debtor’s name must be on the deed)
  • $5,000 for household goods and furnishings (including clothing, computers, art, guns, pets, jewelry, etc.), and an additional $1,000 for each dependent
  • $2,000 for tools of the trade (such as a laptop if used for business purposes)
  • A maximum of $5,000 in value of any property that would otherwise be nonexempt: stocks, bonds, equity above the maximum allowed for an automobile, etc. This is known as the “wild card” exemption, is limited to $5,000.00, and is further limited to the amount of any unused homestead exemption. So, if a debtor claims a $35,000.00 North Carolina homestead exemption, she cannot claim any wild card exemption in any amount. However, if she claims only a $30,000.00 North Carolina homestead exemption, she can use a wild card exemption to protect property worth up to $5,000.00.

Is my car exempt?

Let’s say you have a vehicle with a fair market value of $5,000 titled in the name of a debtor. The debtor owns the vehicle free and clear of liens. $3,500 of the $5,000 in value is protected under the vehicle exemption, leaving $1,500 of equity exposed to creditors. The debtor can use $1,500 of his or her $5,000 wild card exemption to protect that exposed equity from creditors – creditors can’t touch the car.

Changing the facts slightly, the same vehicle was financed with little or no money down, and the debtor is making payments and the lender has a lien on the vehicle. Chances are there is little to no equity in the car; any equity would be covered by the $3,500 automobile exemption, without need to resort to the wild card exemption.

Another scenario is that a debtor owns a vehicle with a fair market value of $10,000.00, free and clear of liens. The debtor can protect $8,500 of the car’s value with the automobile and wild card exemptions, but $1500 in equity remains exposed. The creditor can force the sale of the vehicle and keep any proceeds above and beyond $8500.00, remitting the first $8500 to the debtor.

IRAs and life insurance

North Carolina includes two exemption provisions that are not limited in terms of dollar amounts. The first is Individual Retirement Accounts (IRAs) or any plan that is accorded the same treatment as IRAs under the Internal Revenue Code. Thus, funds in any amount that are in an IRA or similarly treated retirement plan is beyond the reach of creditors.

We have had clients file for bankruptcy with well over $1 million in a protected retirement account; these clients’ debts are discharged and their retirement accounts remain intact.

The second exemption provision, unlimited in dollar amount, is for life insurance benefits when the beneficiary is solely the spouse and/or children. It is especially important to note that the life insurance provision is limited to spouse or children. Do not have a policy payable “to my wife and, in the event of her death, to my estate” unless you want to risk a fight with a creditor or bankruptcy trustee that you might lose.

Other property creditors can’t reach

These are not classified as “exemptions” but these roses smell just as sweet.  They include:

  • Retirement accounts established pursuant to the Employee Retirement Income Security Act of 1974 (ERISA) as well as 401(k) accounts and 403(b) accounts. There is no limit as to the amount.
  • Real property located in North Carolina (South Carolina law is different) and owned by the entireties cannot be touched by creditors.  However, this real property CAN be reached by the Internal Revenue Service .  Unless specifically provided otherwise, real property acquired during marriage by spouses will be owned by the entireties.

Income that cannot be reached by creditors

Social Security income is one of these. Another, of particular importance, is income earned from personal services within 60 days from the date of a sheriff’s seizure or bankruptcy to the extent that the earnings are necessary for family support.  North Carolina also establishes the general principle that there is no wage garnishment, with exception for such things as tax obligations and domestic support obligations.

How can the fact that some types of income cannot be reached by creditors be used as an asset planning tool? The key is being able to trace the funds in an account to these sources. Establish separate accounts that only contain funds from these sources. Co-mingle the funds and they will all be gone, reachable by creditors. The same is true for the proceeds of certain types of exempt property such as personal injury claims, retirement benefits from other states and governmental units of other states, and alimony and child support for example.

Where to take this information

Armed with this basic understanding of asset planning and protection, call my offic and schedule an appointment.  When people are facing financial difficulty they feel vulnerable to criticism and finger pointing.  Never fear. Nothing you face hasn’t been faced by others and addressed. Everything you say to me  is strictly confidential and protected by the attorney-client privilege.

Time is the ally and the enemy of the asset planner.  If asset planning is undertaken before there is significant debt, or while the client is solvent and does not foresee that future business activities are likely to render him or her insolvent, then assets can be moved without concern.  Unfortunately, the asset planner is unlikely to see this situation often.  Normally, clients will have incurred significant debt – usually either from business obligations or questionable investments – before they realize that asset planning is something that they should consider.