Whether you have a lot or a little when it comes to belongings, do you know whether your assets are protected? While there are some assets that have “built-in” protections, others require a more proactive approach.
Qualified Retirement Accounts Such As IRA and 401k Accounts
Federal laws provide protection for IRA and 401k qualified retirement plans. The Employment and Retirement Income Security Act (ERISA) protects 401k monies from creditors (bankruptcy, tax liens, and lawsuits).
Exceptions to the protection afforded to your 401k from bankruptcy proceedings include unpaid taxes, Qualified Domestic Relations Order (QDRO - division of retirement assets in a divorce), and fines or penalties imposed as a result of criminal activity.
The protection limit from bankruptcy for Traditional and Roth IRAs as of 2024 is $1.51 million. It’s important to note that the protection applies to the assets while they are in the IRA and not to assets if they are withdrawn from the IRA before or during the bankruptcy. SEP IRAs, SIMPLE IRAs and most rollover IRAs are fully protected under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).
Life Insurance Policies
The cash value of your life insurance policies in Arizona is generally protected from your creditors. The two-year rule indicates that if a policy has been in place for more than two continuous years and names a beneficiary (spouse, child, parent, sibling or dependent), the cash surrender value is generally exempt from creditor claims. The death benefit of a life insurance policy is generally exempt from creditor claims. See A.R.S. Section 20-1131(A).
Homestead Exemption
You don’t get much help from the federal government when it comes to protecting the equity in your house from creditors. The federal homestead exemption for 2024 is $27,900, which means that $27,900 of the equity in your home is protected from creditors in bankruptcy.
Fortunately most states provide a much higher protection. For example, Arizona’s homestead exemption for 2024 is $400,000. This means that up to $400,000 of the equity in your home is protected from creditors in legal proceedings such as foreclosure or bankruptcy. This protection is automatically applied and does not need to be formally requested as long as the property is your primary residence. The homestead exemption stems from passage of Proposition 209 (Predatory Collection Protection Act), approved by Arizona voters in November 2022. This Act also increased equity protected in Motor vehicles to $15,000, ($25,000 for those with a physical disability) bank accounts to $5,000 and household goods to $15,000.
The homestead exemption applies to several property types, including single family homes, townhomes, condos and mobile homes. If you have more than one property, the exemption can only be claimed on one (typically the primary residence). It does not protect against HOA fees, taxes, and debts related to court-ordered spousal maintenance or child support.
Other assets do not typically have protection without you proactively putting those protections in place. Here are some different assets and different options for you to be able to protect them.
Protecting the Equity in Your Primary Residence
If you have more than $400,000 of equity in your home, then the equity above that amount is not protected. One option you have is to set up a Home Equity Line of Credit (HELOC) with a third party lender. The lender will issue a promissory note and secure the note with a deed of trust. The note will provide a revolving line of credit equal to the amount of unprotected equity in your home. More detail on this method of protecting the equity of your home is provided in the article “Equity Strip Exposed.” If you want to learn more about how to get this done, please contact us. We can help you.
Protecting Your Personal Assets From Your Business with an LLC
If you want to protect your personal assets (house, cars etc) from your business liabilities, then a limited liability company or LLC is a common way to do it. An LLC allows you to own business assets in a business entity which, if properly managed, protects your personal assets from exposure to the risks involved in your business. Often, individuals who own rental properties will own one or more of their properties in an LLC to protect themselves against the risk of being sued by their tenants.
Just be aware that if you own more than one rental property in an LLC that those rental properties are exposed to the risk of the others. In other words, if you have three rental properties owned in one LLC and one of your tenants slips and falls and sues you, the property where the tenant slipped and fell is included in the lawsuit, as well as the other two properties. If you are more risk averse and you want to prevent this from happening, then you would put each property in a separate LLC, which would isolate the risk accordingly. We can help you to navigate the different options when it comes to properly protecting yourself with rental properties and balancing that with your risk tolerance. It is important to note that managing risk with LLCs in this way is not limited to rental properties. These principles are generally applicable with different business types. We provide courtesy consultations to give you an idea of what approach would be best for your situation whether it includes rental properties, other business ventures, or all of the above.
A Family Bank, A Family Office, and An Irrevocable Trust
If you are in growth mode in your business or you have a large estate ($10m and above), it would be prudent for you to learn more about how a Family Bank, a Family Office and an Irrevocable Trust work together to provide you with greater asset protection and tax efficiency. This assumes that you already have a Revocable Trust in place. If you would like to learn more about these structures and how they work together, watch this video. You can also call our office for a courtesy consultation, and we can talk about your circumstances and provide customized recommendations using this planning structure where applicable.
Are Your Assets Bubble Wrapped? © 2024 by Durfee Law Group is licensed under CC BY 4.0 
Are Your Assets Bubble Wrapped?