LLG Blog

Monday, September 20, 2021

Take the Proper Steps to Insulate your Estate from Creditors


For years, you may have viewed estate taxes as the main threat to your family fortune, especially if you own a successful business or valuable real estate. But with the federal gift and tax exemption set at $11.58 million for 2020, estate taxes likely are no longer a concern.

Today you may be more concerned with protecting your estate from creditors and lawsuits. There are several ways to accomplish this objective in accordance with prevailing state laws. 

Personal assets

The way you handle the personal assets comprising your estate can make a big difference. For instance, you and your spouse may own your home or other real estate as joint tenants with rights of survivorship (JTWROS), for convenience’s sake. But this exposes the property to the reach of creditors.

Alternatively, a couple might arrange to own the property as a tenancy by entirety, when permissible under state law. As with JTWROS, the property automatically passes to the surviving spouse on the death of the other. However, in this case, the property can’t be used to satisfy a judgment against the other spouse.

Also, note that you can use the annual gift tax exclusion to reduce the size of your taxable estate without tapping your gift and estate tax exemption. For 2020, the gift tax exclusion is $15,000 per recipient ($30,000 for joint gifts by a married couple).

Insurance policies

One way to protect your assets from creditors is to secure adequate insurance coverage. This includes several types of insurance policies.

Start off with liability insurance for your business. This is especially important for physicians, attorneys and other professionals who are frequent lawsuit targets and must rely on malpractice insurance.

Similarly, by acquiring adequate automobile and homeowner’s insurance, you can guard against a financial catastrophe. Make sure you understand the key elements, including what is covered, the policy limits and which exclusions apply.

You can buy life insurance naming your spouse and children as beneficiaries. If certain requirements are met, the proceeds won’t be included in your taxable state. This is often accomplished through an irrevocable life insurance trust (ILIT).

Business ownership

If you have business interests or real estate holdings at risk, the form of business ownership is critical. Essentially, an entity may be used to distinguish business assets from personal ones and thereby limit a creditor’s ability to seek recovery.

For example, if you’re a sole proprietor or a partner in a partnership, you usually face unlimited personal liability for business debt. One protection method is to form a corporation, limited liability company (LLC) or family limited partnership (FLP) for the business. Generally, this reduces your exposure. However, make sure you understand all the tax and legal implications.

Retirement accounts

Not only does stockpiling funds in a tax-deferred retirement plan such as a 401(k) plan make good financial sense, it also offers protection from creditors. Generally, employer-sponsored plans are covered by the Employee Retirement Income Security Act (ERISA). Qualified plans governed by ERISA benefit from unlimited protection from creditors (except for the IRS and child support liability). Therefore, the more you can contribute to your retirement accounts, the better.

Even retirement plans not covered by ERISA may provide some creditor protection. For instance, IRAs typically have an inflation-indexed protection cap of $1 million (currently $1,362,7800) from bankruptcy proceedings.


Entire books have been written about the use of trusts to protect personal assets. While trusts have many variations and uses, one of their main attractions is their general ability to shelter assets from creditors.

Notably, to protect your assets from judgments, the trust must be irrevocable. This means you can’t revoke it or maintain control over the assets.

For example, when permitted under state law, you might establish a “spendthrift trust” designed to protect funds accessible to beneficiaries like young children or grandchildren. The designated trustee controls the disposition of assets until the beneficiaries reach a specified age. As mentioned above, an ILIT may be used to provide life insurance proceeds without including them in your taxable estate.

A trust may also incorporate charitable giving through a charitable remainder trust or charitable lead trust. Along the same lines, trusts like grantor annuity income trusts or grantor retained income trusts may be funded with business interests and offer tax benefits, if handled properly.

Refocus your estate plan

With estate tax liability no longer an issue for many families, asset protection becomes a primary focus of estate planning. Contact your advisor to discuss which asset protection methods are best for your personal needs.

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