by: Begley Law Group

By:  Thomas D. Begley, Jr., Esquire, CELA

There are a number of strategies that are used to protect assets from creditors.  Some of them work, some of them do not.  Some work with limitations.  In considering asset protection strategies the Uniform Voidable Transaction Act (formerly known as the Uniform Fraudulent Transfer Act) must be considered.  This Act was adopted in New Jersey on August 10, 2021 and makes various revisions to the Uniform Fraudulent Transfer Act (R.S.N.J. 25:2-20).  A transfer is fraudulent if it is intended to hinder, delay or defraud any creditor of the debtor.  In determining intent, consideration is given to a number of factors including:

  • whether before the transfer was made the debtor has been sued or threated with suit,
  • the transfer was of substantially all of the debtor’s assets,
  • the debtor was insolvent or became insolvent shortly after the transfer was made, or
  • the transfer occurred shortly before or shortly after a substantial debt was incurred.

The debtor is insolvent if, at a fair valuation, the sum of the debtor’s debts is greater than the sum of the debtor’s assets.  A debtor who is not paying his debts is presumed to be insolvent.  Generally, a transfer is fraudulent if the debtor does not receive a return of real market value.  An attorney can be held liable for fraudulent transfers by a client.  The attorney has a duty to “know your client.”

Common asset protection strategies include the following:

♦ Assets in the Name of a Spouse 

Assets in the name of the non-debtor spouse are generally exempt from claims of the debtor’s spouse, except under the “Doctrine of Necessities.”  The Doctrine of Necessities holds that one spouse is responsible for the “health and well-being” of the other.  This would include unpaid medical bills of the debtor’s spouse.  Acquiring or placing assets in the name of a non-debtor spouse might be a good strategy for asset protection purposes, but tax implications must be considered.

♦ Tenants by the Entirety

Tenants by the Entirety is a form of ownership reserved for married couples, and in New Jersey, is limited to joint ownership of real property.  As a general rule, assets held as tenants by the entirety are exempt from the creditors of one spouse but are still vulnerable when both spouses are responsible for the debt.  In New Jersey a creditor cannot for a partition of property owned as tenants by the entirety when only one spouse holds the debt.  However, the proceeds of the sale of a home appear to be exempt only to the extent that the home was a “home of modest value.”  This exemption may not apply is the home is very valuable.  Also, if a debtor goes bankrupt, it is unsettled whether a creditor can execute and levy on the debtor’s interest in tenants by the entirety property.  Tenants by the entirety property does not offer protection from the Internal Revenue Service (“IRS”) when one spouse owes federal taxes.  The IRS can seek partition in this case.


Tenants by the entirety does not offer protection if:

  • there is a divorce;
  • there is death of the non-debtor spouse; or
  • the creditor is a creditor of both spouses.

♦ Life Insurance

Life insurance is generally exempt from claims of creditors, if the beneficiary:

  • is not the insured or the estate of the insured; and
  • is not the person who effected the policy or the estate of that person.

But the amount of premiums paid within the statute of limitations for bankruptcy will inure to the benefit of the creditors.

♦ Inheritance

Inheritances are available to the creditors of the estate beneficiary.  The solution is for the testator to include a spendthrift trust for any beneficiaries who have creditor issues in his or her estate plan, and to ensure that all applicable beneficiary designations direct into the spendthrift trust.

♦ Annuities

There are several types of annuities.  One is a revocable annuity, which the owner can liquidate at any time.  This would be subject to claims of creditors.  Another type of annuity is an assignable annuity.  This would also be subject to claims of creditors.  Another type of annuity is an irrevocable non-assignable annuity, which cannot be liquidated by the owner or annuitant. Irrevocable non-assignable annuities are exempt from claims of creditors until distributions are made.  However, distributions from irrevocable, non-assignable annuities are subject to claims of creditors.  However, in Bankruptcy Court in New Jersey, $500 per month of annuity benefits is automatically exempt from claims of creditors.  A court may allow an additional exemption given the requirements of the beneficiary and/or the beneficiary’s family.

♦ Retirement Plans

There is a distinction between an IRA and an employer-sponsored retirement plan.  In New Jersey all plans, including IRAs, are generally exempt from creditor claims, until the money is distributed.  Under federal law, many retirement accounts are generally protected except for Traditional IRAs and Roth IRAs.  The exemption for those accounts is $1,512,350 in 2022.  This amount will change on April 1, 2023.  There are exemptions from creditor protection for retirement accounts.  These include:

  • federal tax levies;
  • divorce; and
  • inherited IRAs in bankruptcies.

However, some courts have not followed the inherited IRA exception.

♦ Homestead

New Jersey and Pennsylvania are the only two states in the Union that do not offer homestead protection from claims of creditors.  Minimal protection is available in bankruptcy court.

♦ 529 Plans

Contributions made more than two years prior to filing for bankruptcy are exempt from creditors.  NJBEST accounts are exempt from New Jersey bankruptcy.

♦ UGMA Accounts

UGMA accounts are irrevocable accounts that belong to the beneficiary of the account and are, therefore, exempt from the claims of creditors.

♦ Limited Liability Partnerships (LLP)

Creditors have a right to charge the debtor’s interest in the partnership.  Creditors only have the rights of an assignee of the partnership interest.  Creditors can only receive distributions the partner would have been entitled to receive.  The creditor has no say in the management of the partnership, nor does the creditor obtain any other rights associated with being a partner.

For federal income tax purposes, the creditor who has a charging order is subject to taxation on the debtor’s allocable share of partnership profits, even if the creditor does not receive any distributions. A charging order is a court-authorized lien imposed by a creditor on distributions made from the business entity.

♦ Single Person Limited Liability Company (LLC)

  • The IRS disregards the LLC for tax purposes for employment taxes. The owner of the LLC is responsible for the employment taxes.
  • It is unclear in New Jersey whether the rights of the creditor are limited to a charging order. To date there are no New Jersey cases.  There are three rationales why a creditor of a member of a single member LLC should be able to assert a claim against the LLC.
  • Piercing the Veil. This is especially true if the LLC is undercapitalized.
  • Nominee Liability. Assets held by a nominee may be attached to satisfy claims against the true owner.  Factors include pervasive control by the entity owner and failure to observe business formalities.
  • Fraudulent Conveyance. This overrides the LLP Act and the LLC Act.

♦ Self-Settled Special Needs Trust

Self-Settled Special Needs Trusts, which are trusts established by an individual for his or her own benefit, offer no protection from creditors in either New Jersey or Pennsylvania.

♦ Self-Settled Asset Protection Trust

Nineteen states (excluding New Jersey and Pennsylvania) have Asset Protection Trust statutes.  Common issues in the formation of Asset Protection Trusts in these states include:

  • Time Period for Challenging Transfers to Trusts. these time periods range from 18 months to four years.  This means that transfer to the trust made during that time period may be set aside by a creditor.
  • Other Assets are Available to Satisfy a Marital Claim in a Divorce. These claims would include property settlement and alimony.  States go both ways on this issue.
  • Child Support. Are assets in a Self-Settled Asset Protection Trust subject to claims of child support?  States go both ways on this issue.
  • Tort Claims. Generally, Asset Protection Trusts cannot protect against preexisting tort claims.

Common features of Asset Protection Trusts include:

  • Independent trustee residing in the trust jurisdiction.
  • Trustee has absolute discretion.
  • No health, education, maintenance and support (“HEMS”) standard.
  • Spendthrift provisions.
  • Trust property must be located in the jurisdiction recognizing the Asset Protection Trust (i.e., for a Delaware Asset Protection Trust, the assets must be located in Delaware). Liquid assets of a New Jersey or Pennsylvania resident can be moved to Delaware, but real estate located in New Jersey or Pennsylvania cannot.
  • The trust grantor may retain a limited power of appointment to direct distributions during lifetime to someone other than the trust grantor.
  • The trust may provide for investment advisors, other than the trustee.

♦ Third Party Spendthrift Trust (Bloodline Trust or Third Party Special Needs Trust)

A Spendthrift Trust for the benefit of a third party is recognized in every state.  There is no public policy rationale for finding that a trust estate should be made available to the beneficiary’s creditors.

The seminal case in New Jersey is Tannen v. Tannen[1] that arose out of a divorce.  In this case a husband sought to obtain alimony from the trust established by the parent for the benefit of the daughter.  The husband also wanted the income generated by the trust to be considered available to the wife for purposes of considering alimony.  The trust gave the trustee discretion over distributions and contains spendthrift provisions.  The court held that the beneficiary of a discretionary trust cannot compel payment to himself or application for his own benefit.  Therefore, the beneficial interest in the trust was not an asset to which he had access.  It was, therefore, improper to impute income from the trust in determining her alimony obligation.

The New Jersey Uniform Trust Code (3B:31-36) recognizes the validity of Spendthrift Trusts and their affect on creditors.  The spendthrift provision is valid, even though the beneficiary is named as sole trustee or co-trustee.  However, good practice would seem to dictate co-trustees.

A Third Party Special Needs Trust falls within the framework of a Third Party Spendthrift Trust.

In conclusion, there are a number of strategies available for asset protection, but careful thought needs to go into determining which option is best for each client’s unique facts and circumstances.  Begley Law Group would be happy to discuss these with you during our estate planning consultation.

[1] 416 N.J. Super. 248 (App. Div. 2010), aff’d 208 N.J. 409 (2011)