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Wednesday, January 3, 2018

What Assets are Protected from Creditors?

Regardless of the President that is sitting in the Oval Office, the litigious nature of our society is not going to change.  There are many instances in which a client can be sued, including but not limited to: injuring someone in a car accident, being sued for malpractice, involvement in a business dispute, or owning a rental property in which someone was injured.

Certain assets are exempt from creditors as a matter of public policy:

  1. Retirement account assets. Assets such as IRAs, Roth IRAs, 401K, 403B, and qualified profit sharing plans are protected under federal law. Inherited IRAs, however (i.e. an IRA left to a child by a parent), may not be protected from creditors because they are not protected in the event of a bankruptcy. This asset protection benefit is one of the reasons why retirement accounts are so popular.

  2. Real Property owned jointly with a spouse. Real property that is owned by both spouses as “tenants by the entirety” is protected from creditors of one spouse. This can provide a peace of mind for the couple’s primary home, however one should remember important limitations. First, if one spouse dies or if the couple divorces, then the protection ends and the home becomes subject to liabilities of the surviving spouse. Second, ownership by the entirety is no protection against a creditor of both spouses.

  3. Homestead exemption. Depending on the county in which you live, New York State provides a homestead exemption of only up to $165,500 for your primary residence. Of course, living in NYC, this amount usually covers only a small portion of your primary residence. So if you are not married and own your own property, be prepared for creditors to claim your home as an available asset!

  4. Life insurance policies. A policy on a person’s life that names the person’s spouse, children or another person as a beneficiary is protected during the insured’s lifetime. Creditor’s protection extends to the death benefit, cash surrender value, and available loan value of life insurance policies. Creditors cannot force the owner to surrender the policy or to borrow against the policy.

And this is it! The rest of your assets are available to creditors, unless you take steps to protect them.

Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship.


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