A judge might allow creditors to take your stocks, money and just about everything except the shirt on your back. However, you can protect stock from creditors through careful preparation. If you try to protect stocks only after a court judgment, you might be charged with fraudulent transfer and find yourself in even worse straits. Always work with a local attorney if you find your assets under siege because some protection strategies depend on state law.
In general, all of the assets, including stocks, in a qualified employer plan covered by the Employee Retirement Income Security Act are safe from creditors. These plans include defined benefit plans, SEP IRAs, SIMPLE IRAs, and defined contribution plans such as 401(k), 403(b)s, and 457s. However, if the creditor is your spouse or the Internal Revenue Service, even an employer plan might not help. Federal law protects the first $1.095 million of assets in individual retirement accounts, but only if you file for bankruptcy. If you don’t file for bankruptcy, state law determines the amount of protection your IRA assets will receive.
Although state laws vary, you might be able to protect stocks by owning them in a non-qualified variable annuity plan. You can contribute any amount to a non-qualified variable annuity and use the money to buy stocks, mutual funds and other investments. Some states protect the cash surrender value of an annuity, while others protect the death benefit. Still other states offer no protection at all. Your lawyer will advise you on how your state handles annuities. You can also establish an annuity in your spouse’s name or simply transfer stock ownership to your spouse. However, things might not work out as planned if you and your spouse divorce.
Trusts, Partnerships and LLCs
An irrevocable asset protection trust administered by an independent trustee can protect your stock from creditors. At one time, asset protection trusts were only available offshore, but now several states allow them as well. These states require the trustee to be located in the state. Some trusts allow you to occasionally receive income. A trust alternative is a family limited partnership in which you place your stock shares and in return receive limited partnership shares. However, family partnership shares have limited value to anyone other than family members. Transferring stock to a limited liability company might also provide you some asset protection, although many loopholes exist. Effective asset protection through trusts, LLCs and partnerships can be tricky to set up correctly, so it’s prudent to seek the advice of a qualified lawyer.
Your next-door neighbor might become your creditor if he is hurt on your property. The judgment from a liability lawsuit might force you to sell your stocks to pay the damages. You can protect yourself from large liability awards though an umbrella liability insurance policy, which cover almost all types of liabilities, except in cases in which you deliberately attempt to defraud the insurer. You can buy policies that provide several million dollars of protection. If you lose a liability lawsuit, the insurance company pays, and you get to keep your stocks.
- Shefsky & Froelich, Ltd.: Retirement Plans and Creditor Protection
- Summit Alliance Financial: Creditor Protection for Life Insurance and Annuities
- Morgan Stanley: Domestic Asset-Protection Trusts
- Rubinstein & Rubinstein, LLP: Efficacy of Family Limited Partnerships: A Case Study
- Nolo: Strategies to Strengthen LLC Asset Protection
- Kiplinger: Why You Should Have Umbrella Liability Insurance
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