Asset Protection Updates

Along with exemptions for homestead and retirement plans, state law exemptions for life insurance and annuities are often valuable tools for asset protection planning.  Because the asset protection planning undertaken by most estate planners and asset protection planners involves clients with substantial assets, we are primarily concerned with the protection of the cash value of life insurance and annuities.  The federal bankruptcy exemption for life insurance cash value is $10,775 where the insured is the debtor or a person on whom the debtor is dependent (including the debtor’s spouse).

About a third of U.S. jurisdictions have low-value or no exemption for life insurance cash value. Other jurisdictions have exemptions that provide substantial protection.  The exemption statutes of some jurisdictions, such as Florida, Hawaii, Arizona, and Texas, make it clear that the cash value of a life insurance policy or annuity contract owned by a debtor is protected from claims of the debtor’s creditors.  The statutes of many others, unfortunately, are hardly models of clear drafting. The confusion is precipitated by the fact that there are a number of roles a person can play with regard to a life insurance policy or annuity contract.  The debtor might be (1) the owner; (2) the insured; or (3) the beneficiary.  Furthermore, many, though not all, exemptions for life insurance and annuities are predicated on protection of a favored class, generally spouses and dependents.  Finally, just what are the interests in an insurance policy or annuity contract that are to be exempted? The clause “proceeds and avails” appears in the exemption statutes of many jurisdictions.   In some states, this clause is defined to include cash surrender values and loan values. In the statutes of many states, “proceeds and avails” and similar terms are undefined in the statutes.  Therefore, it is left to the courts to decide what is exempted by the statute.  Courts in some jurisdictions have found that such vague exemption statutes cover cash surrender value (see, e.g., In re Worthington, 28 B.R. 736 (Bankr. W.D. Ky 1983); In re Gablehart, 138 B.R. 425 (Bankr. D. Vt. 1992)),  others have found that they do not (see, e.g., In re Monahan, 171 B.R. 710 (Bankr. D. N.H. 1994)).   Others have added additional twists in construing the often tortured language of insurance exemption statutes (see, e.g., In re Sloss, 279 B.R. 6 (Bankr. D. Mass. 2002) (cash value is protected from owner’s creditors for the benefit of the original beneficiary; if the beneficiary has been changed since the policy was effected, the exemption does not apply)).

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1. File timely annual reports with the Secretary of State.

2.  Operate using the proper name of the company.  If the company uses a fictitious name (a “d/b/a” name), be sure that it is registered with the proper authorities, such as the Secretary of State and county registries.

3.  Be sure that the company’s clients, customers, vendors and other third parties know that they’re dealing with the company, and not you personally, in contracts, on invoices, etc. 

4.  When signing a contract on behalf of the company, be sure that the small print doesn’t hold you personally liable, and be sure to indicate that you’re signing not personally, but as an officer, manager, partner, etc.

5.  Don’t mix business and personal finances.  Don’t pay personal expenses from the company’s account.  Document all payments from you to the company as capital contributions or loans, and from the company to you as compensation, dividends, etc.

6.  Be sure that your company’s auto insurance covers to cover potential liability when your employees use their personal vehicles for your business purposes.

7. Be sure that company retirement plans and other benefits plans are properly maintained and that all required IRS and Department of Labor filings for these plans are made on time.

8.  Have the company’s CPA send an letter to the company’s attorney each year letting the attorney know what tax-related items should be documented in the company records for tax purposes, including, for example, owners’ salary and bonuses, loans to owners, capital contributions, major sales and purchases of capital assets, etc.

9.  Hold annual meetings and document the company’s major activities for the year in the minutes of the meeting.

10.  If equipment and real estate are owned separately from the operating business (as they should be, when practical), be sure that arm’s-length leases are in place.