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Asset protection suggestions- Trusts, Family Ptrships, Equity Stripping, etc.

edited December 2021 in Other Investing
Was wondering if anybody recommends use of Trusts for Asset protection (from creditors/lawsuits, etc)?

Family Partnerships or LLCs seems like a possibility.

Irrevocable trusts mean you have to yield control, which is a no-no for me.

Not comfortable with an overseas setup for protection.

Equity stripping (placing “friendly” liens on your assets in favor of an entity you own or control) is another tactic that sounds a bit iffy.

A Land Trust may be of interest since we do own our home.

Anybody have experience setting up decent protection? I realize the best plan would likely vary from state to state based on local laws. I am not worried about succession issues, just security in the event I get rushed to the hospital and have to stay there, and then they slam me with a $1.5M charge. Or maybe to defend from a lawsuit if I were to get in a bad car accident.

I am not really a "High Net Worth" individual, but i would like some sort of safety blanket.


  • Be aware that workplace plans including 401k/403b have the highest protections. The same is true for rollover T-IRAs with only 401k/403b funds (i.e. without any personal contributions). This protection is available without doing anything.

    But a common mistake people make is rollover into a tainted/mixed T-IRA with both rollover funds and personal contributions, or consolidate all T-IRAs into one T-IRA in the name of simplification or for saving annual account fees (if any).
  • How about "Umbrella Insurance" from a major insurer?
  • Disregarding state law protections, IRAs of every ilk including conduit IRAs have less protection than employer plans.

    Employer plans are usually covered under an anti-alienation rule that prohibits them from turning moneys over to creditors or pretty much anyone else other than the owner. Period.
    Qualified (401(a)) plans:

    In contrast, the unlimited protection for employer plan assets rolled over into IRAs comes from the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). This only protects debtors during bankruptcy. (The name of the statute is the giveaway.)

    A debtor's choice appears to be to declare personal bankruptcy or rely on state statutes to protect IRA assets from creditors.

    The unlimited BAPCPA protection applies to assets coming from employer retirement plans. So long as a debtor can show that IRA assets originated in an employer plan, those identified assets have unlimited protection. Certainly segregating them into a separate rollover IRA makes this source identification ("tracing") task easier. But it is not necessary, and commingling is not a mistake. Keeping inadequate records is.

    Having an IRA labeled "rollover" doesn't prove that all the assets in it came from rollovers. I've owned "rollover" IRAs with commingled assets. I also have impeccable records:-)
    To make sure that an individual receives the full $1 million exemption [currently adjusted to $1,362,800] 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.
  • Thanks, Yogi. I wasn't sure if that was still the case these days. So, if retirement funds are covered (401Ks/IRAs), that just leaves Taxable funds (savings or brokerage accounts), assuming I were to setup a Land Trust.

    For RE, I would not receive much coverage from the low Homestead Act exemption in my State.

    Unless there are better ideas?

    If I went to 5 different lawyers with this, I wonder if I would get 5 different answers.
  • carew388 said:

    How about "Umbrella Insurance" from a major insurer?

    I do currently have an Umbrella policy layer, but is it true that the Insurance company can turn around and go after you for having to payout on certain types of claims? This would make the whole industry a sham, I guess. Maybe I just need to review my limits.

    I don't ever remember hearing anybody say "Yeah, thank God for my Umbrella policy - really saved my hide this time." The premiums are so cheap that you wonder if they pay out.

  • msf
    edited December 2021
    Generally speaking, umbrella policies don't cover health care.
    Umbrella insurance doesn’t cover your own injuries or property damage — you’ll need other types of coverage for that (such as health insurance or collision coverage on your auto insurance).

    That's not to say there's no such thing as umbrella health insurance, just that at best it's quite uncommon.

    IMHO umbrella policies are excellent "investments" for liability protection. They're inexpensive largely because they're rarely needed. This is because they require you to carry a fair amount of underlying coverage. They're also reasonably priced because they're simple products. You're only paying for the added insurance, not for bells and whistles.

    The good news regarding getting hit by a $1.5M medical bill either because the hospital used out of network providers ("surprise bills") or insisted that you pay what your insurance did not ("balance billing") is that there's a new federal rule prohibiting or severely restricting these practices. It goes into effect Jan 1. Some states already provide these protections.

    [I know someone who got hit with a $500K balance bill in a state with protections. They wrote a note to the assisting(!) physician who presented this bill, filed a simple form with the state government, and never heard from the doctor again.]
  • Thanks, msf. That "No Surprises Act" directly addresses one of my largest concerns.
    Didn't see these regulations mentioned in the media.
  • Both of the lawyers I talked to over several years, told me that 401ks are protected, but did not mention contributory IRAs are more vulnerable.

    An Umbrella policy increases the liability limit on your current homeowner's and auto insurance. Good to have but read the fine print on what is covered. Medical bills unless from a car accident or injury on property are not.

    As I understand it anyone obtaining a judgement against your LLC assets cannot demand distributions from it, other than the distributions that the LLC makes anyway. Thus you the manger are not required to pay off such a creditor, but I think that creditor can share in any distributions that are made. It does make it more complicated and expensive for someone to try to attach your assets.

    It is pretty easy to set up and costs around $1000 but I would use a competent lawyer, not do it yourself. Another advantage to an LLC holding your investments is that the LLC can deduct expenses like investment expenses. You should not use it to pay any expenses that are not directly related to the investments, and you do have to file a separate partnership tax return on March 15 that is hard, but not impossible to do with TurboTax Business. If you use a CPA it will cost several hundred dollars.

    Many states require an LLC to file an annual report and some require a fairly high annual fee ( up to $500), so check carefully.

    There are other entities I have heard of ( Delaware companies, offshore companies) that are even more protective but much more expensive to maintain.

  • sma3 said:

    Both of the lawyers I talked to over several years, told me that 401ks are protected, but did not mention contributory IRAs are more vulnerable.

    For 401k/403b assets rolled into T-IRA, most of the protections of 401k/403b carryover to T-IRA.

    For regular T-IRAs with personal contributions, only state-level protections apply and they range from nil/low to generous. So, check your state rule. Then there are issues such as what if you moved?

    So, it is best NOT to mix 401k/403b rollovers with personal contributions - that results in mixed/tainted T-IRA. Some argue that courts may sort out which contributions came from 401k/403b and which from personal contributions and apply protections appropriately. But then the T-IRA in question may be frozen while the court and lawyers sort this out, and who will pay them to sort this out? Probably you. So, why create this mess?

    It is also true that the broker may create a Rollover T-IRA when you first transfer 410k/403b funds, but they may not care what happens after that. YOU will have to keep it pure - i.e. put in more funds from other 401k/403b only, but not any personal contributions.

  • As we're looking at protection given to rollovers by the BAPCPA, we're talking about bankruptcy proceedings. Some retirement assets (employer plans, money rolled into IRAs, another $1.36+M in IRAs) are protected, but this money becomes fair game if it's withdrawn before the case is decided/settled.
    It is generally a bad idea to withdraw from a 401(k) or other retirement account or try to “cash-out” the account for any purpose since the money becomes income and is no longer exempt in your bankruptcy.

    So you're free to manage (reallocate) your protected assets while the case is ongoing. But if you withdraw money, it becomes just as subject to being frozen as money that was never protected.
    Any IRA money that a debtor claims in good faith to be rollover money is considered exempt (protected). It's up to the bankruptcy trustee to prove otherwise.

    One gets this protection, best practices or not. Nevertheless, following best practices (and having the statements to prove it) would likely dissuade a trustee from objecting to the exemption, depending on the amount of money involved.
    The Court Must Construe Exemptions Liberally In Favor Of the Debtor, And The Trustee Bears The Burden Of Proof Here.
    ... Properly exempted property is not available to pay the claims of the debtor's creditors. The Court must construe the claim of exemption in the Recipient IRA liberally in favor of the Debtor. [citations omitted.] And the Trustee, as the party objecting to a claim of exemption, bears the burden of proving that the Debtor improperly claims this exemption. [citations omitted.]

    While I think this is still correct, take it with a grain of salt. It's from a decision not for publication, and at least one part of the decision was subsequently overturned by a unanimous Supreme Court: As of 2014 inherited IRAs do not get the same protection because they are not regarded as retirement accounts. But they did in this earlier 2010 case.
  • Yep, inherited T-IRAs are not protected as they lose connection to the protected T-IRA.

    Also note that I have been careful mentioning only T-IRAs (not IRAs generically) as R-IRAs also lose connection to protected T-IRAs after Roth Conversion(s).

    R-IRA that has only Roth 401k/403b or after-tax 401k/403b money should be protected.
  • and you do have to file a separate partnership tax return on March 15 that is hard

    Single member LLCs may be treated as "disregarded entities" by the IRS; they have no partnership tax returns to file.

    As Nolo writes, in some states single member LLCs may provide a lesser level of asset protection than multiple member LLCs. But it varies by state, and if yours is a state where there's no difference, then why bring extra paperwork and a partner into the mix?
    An LLC provides the same protection as a corporation against creditors of the business. However, there is some uncertainty as to whether a [single member LLC] SMLLC member will receive the same protection from liability that members of an LLC with multiple members receive. While the law is clear in most states, this is still an evolving issue.
    Courts in a few states have found that the charging order protection that exists for LLCs does not apply with SMLLs because there are no co-owners to protect. These cases created a great deal of uncertainty in other states with similar charging order protection laws. In response, several states amended their LLC laws to make it clear that SMLLCs are entitled to the same protection from creditors as multi-member LLCs
  • IRA protections by states for contributory IRAs.

    The table provides info for traditional IRA and Roth IRA which leads me to the following:. Brokerages do not seem to designate Rolledover Roths as such. All the brokerages I know just have Roth IRA but no Rollover Roth IRA and Roth 401(k) funds are rolled over to a Roth IRA account. Why is there this distinction between Traditional vs Roth at brokerage level? Do rolledover Roth 401(k) funds not receive the same protection as rolledover 401(k) funds?
  • Howdy folks,

    Better minds have outlined the details so I'll just summarize things. Buying an investment vehicle from an insurance company is like buying your golf clubs at McDonald's.

    And wear the damn mask,

  • BaluBalu said:

    Brokerages do not seem to designate Rolledover Roths as such. All the brokerages I know just have Roth IRA but no Rollover Roth IRA and Roth 401(k) funds are rolled over to a Roth IRA account. Why is there this distinction between Traditional vs Roth at brokerage level? Do rolledover Roth 401(k) funds not receive the same protection as rolledover 401(k) funds?

    Why no rollover Roth IRAs? Likely because of the sequence of changes in the law.
    Sometimes called a “rollover IRA,” a conduit IRA holds only retirement plan rollover assets. These Traditional IRAs were established to temporarily hold retirement plan rollover assets, such as savings in a 401(k) or profit sharing plan. By segregating the assets, the individual can later move the savings back to another retirement plan and retain certain tax benefits. If the individual makes other types of IRA contributions, such as regular IRA contributions, the IRA loses its conduit status.

    This is supported by old Pub 590s. See, e.g. the 2000 version, p. 17.

    So originally there was a need for "pure" (untainted) conduit IRAs, and brokerages tagged IRAs as such. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) did away with this need. It allows employer plans to accept transfers from IRAs regardless of whether the assets originated in other employer plans.

    Here's the current IRS chart of permitted transfers:

    EGTRRA also created Roth 401(k)s; before this they did not exist. (They didn't come into existence until even later, in 2006.) So by the time Roth 401(k)s were created, there was no longer a need for conduit IRAs. Thus no need for brokerages to tag Roth IRAs as rollovers.

    As to unlimited BAPCPA bankruptcy protection, that is something that applies to assets that originate in employer plans. There's no distinction between between Roth assets and traditional assets. This may be inferred from the absence of "Roth" in the text of BAPCPA.
  • Thanks @msf. You are always detailed and to the point, a balance very few strike. I hope you stick around. Thanks for your service.
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