Asset Protection: Exempt Assets

State Exempt Assets

State exemption leveraging should be a fundamental part of a financial plan. Some significant state exemptions are:

1.QRPs and IRAs;

2.Primary residence (or homestead);

3.Life insurance;

4.Annuities.

Outside of bankruptcy, any protection for QRPs or IRAs is provided by state law. Most states provide +5 protection for QRPs. Fewer states shield IRAs at a +5 level. For IRAs, a number of states will only protect the amount reasonably necessary for support, leaving it up to a judge to decide how much should be shielded in any particular case. This is generally adequate for an investor who has not accumulated large amounts in such accounts. However, it may not be sufficient protection for investors with larger portfolios.

Primary Residence: Homestead

For most people, the home is their most valuable asset. While many states offer homestead protection in litigation, few states provide a total +5 shield for the home. (See our article on the sliding scale of asset protection.)

Most states protect between $10,000 and $60,000 of the homestead’s equity. Some states, such as New Jersey, provide no protection, while other states—Florida, Iowa, Kansas, and Texas—provide unlimited protection. In Arizona, the homestead protection is $150,000 and in Wisconsin it is $75,000. Given today’s real estate values and the equity that many investors have in their homes, it is clear that most states’ homestead exemptions provide inadequate protection.

To determine how well a homestead law protects your home, you should compare the protected value to the equity. In order to do so, subtract the value of any mortgages from the fair market value of your home. For example, if you live in a home with a $950,000 fair market value and have a $550,000 mortgage, then your equity is $400,000. If your state protects only $75,000 through its homestead law, as it does in Wisconsin, then you still have $325,000 ($400,000 of equity minus $75,000 homestead) of vulnerable equity.

Homestead protection is often automatic but in some cases may require additional action. Each state has specific requirements for claiming homestead status. In some states, you must file a declaration of homestead protection in a public office. Other states set a time requirement for residency before homestead protection is granted. Never assume your home is protected. Your wealth management team can show you how to comply with the formalities in your state.

Life Insurance

All 50 states have laws protecting varying amounts of life insurance.

For example:

•Many states shield the entire policy proceeds from the creditors of the policyholder. Some also protect against the beneficiary’s creditors.

•States that do not protect the entire policy proceeds set amounts above which the creditor can take proceeds.

•Many states protect the policy proceeds only if the policy beneficiaries are the policyholder’s spouse, children, or other dependents.

•Some states protect a policy’s cash surrender value in addition to the policy proceeds. If you have substantial cash value in a life insurance policy, be sure to consult your wealth management team who will check the state exemptions and recent cases to determine how well protected you are.

•If the policy is purchased as part of a fraudulent transfer, a court can undo the policy. This is the same for any other fraudulent transfer.

Annuities: Shielded in Many States

Another exempt asset in many states is an annuity. An annuity is a contractual agreement between an insurance company and an investor. The investor gives money to the insurance company today in exchange for a potential return on the investment. The investor keeps the money with the insurance company over a long period of time and in return receives tax-deferred growth and strong protection of the principal on the sliding scale of asset protection. By using one of the various types of annuities an investor can vary the risk/return balance depending on his or her investing time horizon and risk tolerance. This diverse list of benefits makes annuities important components of asset protection and wealth accumulation plans.

We hope that it is clear to you that you should consider including exempt assets in a central manner with regards to your asset protection planning. Because the technical interplay among these assets can be exceedingly complex, it may be worth the time to consult with a multispecialty team that includes professionals who have experience with insurance products, tax, credit, QRPs, and asset-protection.

Kevin B. Perlberg, CFP®, is principal of Blackhawk Capital Partners. You can reach him at (480) 257-1604, or kevin@blackhawk-capital.com.

Susan Brousseau CLU, ChFC, CFP®, is Senior Vice President and Wealth Advisor for Blackhawk Capital Partners. You can reach her at (480) 505-2011, or susie@blackhawk-captial.com.

Kevin B. Perlberg, Donald (Trace) W. Tendick, Tom Kueht and Christopher Nei are registered representatives offering securities through United Planners Financial Services, member FINRA, SIPC. Advisory services offered through Blackhawk Capital Partners. Susan Brousseau and Mike Miller offer Advisory Services Only. Blackhawk Capital Partners and United Planners Financial Services are independent companies.