This is not our usual article dealing with rep issues, but is important to all manufacturers, reps and distributors and others who may accumulate wealth.

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While many individuals place substantial emphasis on maximizing their earnings and accumulating wealth, many fewer individuals focus their attention on protecting their assets from creditors. Because of our increasingly litigious society, greater emphasis should be given to using available strategies to protect assets from creditors. While few — if any — asset protection strategies are ironclad, proper planning can make it more difficult for a creditor to attach assets of an individual. Some of the basic asset-protection strategies are described here.

Home Ownership

The laws of many states allow the principal residence of a husband and wife to be owned in a form of ownership known as tenancy-by-the entirety. When a married couple living in such a state owns their home as tenants-by-the-entirety, the creditor of one spouse cannot force the sale of the residence, based on the legal premise that the tenancy can be ended only by the actions of both parties. If one spouse has an uninsured liability, for example, the creditor cannot force the sale of the house; but at best could place a lien on the house, thereby permitting the couple to continue to reside in the residence. Married couples who own their principal residences in a form of ownership other than tenants-by-the-entirety should strongly consider retitling their homes, if permitted to so.

Retirement Assets

Qualified retirement plan assets are generally exempt from creditors under the federal law known as the Employee Retirement Income Security Act (“ERISA”). Workers who are covered by employer-sponsored retirement plans will benefit by maximizing the amount of contributions to such plans, 401(k) plans, profit sharing plans and other types of qualified plans. One noteworthy exception is that ERISA does not protect from creditors assets held in a plan maintained only for the business owner, so a one-participant plan may not have the same shield from creditors enjoyed by participants in other qualified plans. While not all state laws are the same, the laws of most states protect assets which are held in such owner-maintained plans. The laws of many states also protect assets held in individual retirement accounts. For residents of those states that do not protect ERISA assets, other strategies may need to be employed to shield assets from creditors.

Cash and other Liquid Assets

An obvious target of creditors is cash and other liquid assets held in the name of a debtor. An opportunity to protect these assets is available by contributing these assets to an entity such as a limited liability company owned by more than one person. A husband and wife, for example, can contribute assets to a limited liability company and make it difficult for the creditor to reach the contributed assets if the company is properly structured.

Trusts

Trusts are a cornerstone of asset protection planning, primarily for those who are recipients of assets from others. Properly created, a trust can hold assets for beneficiaries which are not subject to attachment by creditors of trust beneficiaries. Trust beneficiaries generally must forego holding the right to vest trust assets in themselves. For maximum asset protection, a third party should serve as a trustee of the trust. Beneficiaries can nevertheless indirectly control the trust funds by holding the power to change the trustee, and, through other creatively designed features, maintain the opportunity to access the funds as necessary.

Life Insurance

Life insurance policies are generally exempt from the insured’s creditors in Illinois if the proceeds are payable to a spouse, child, parent or certain other relatives. Such is the case even if the insured maintains the right to change the policy beneficiary. The exemption may be lost if the policy proceeds are payable to a trust. However, if the ownership of an insurance policy is transferred to a third party, including a trust in which the owner has no further ownership rights in the policy, then the creditors of the owners transferring the policy may not be able to attach the policy or its proceeds. Since each state is different, the laws of your state should be checked to determine if insurance policy proceeds are exempt.

Conclusion

The foregoing are just some of the asset protection techniques which are available. Asset protection planning can provide significant rewards. For those who wait too long before undergoing the necessary planning, transfers may be set aside as violating state fraudulent conveyance laws. For those who take steps now to protect their assets from creditors before the events occur which give rise to creditor claims, continued, uninterrupted enjoyment and ownership of assets may be realized.