Report: Are Your Assets Protected From Creditors: Are You Bullet-Proof?

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



Many business and professional people have worked for a long time and have accumulated significant assets. They hope to benefit themselves and their families during their working careers and also in retirement.

The first step in asset protection planning would be to do a risk analysis. What are the likely litigation threats to my professional practice or business? How can I minimize those threats? What should I have in place if the threat becomes a reality and results in litigation? Tax and investment objectives must be considered in determining which asset protection strategies to pursue.

We live in a litigious society. Business and professional people have significant exposure to claims from creditors, because of the activities in which they engage and because they have assets and, therefore, make good targets. There are steps that can be taken to protect assets from claims of creditors, if they are taken in a timely manner. An individual cannot wait until a claim is filed, or even an incident has occurred that may lead to a claim, before taking action. Steps must be taken in advance. The Fraudulent Transfer Act is discussed below.

This Special Report will discuss the strategies for asset protection from simple to complex. These strategies include obtaining the proper insurance, proper titling of assets, retirement plans, structuring business assets, Domestic Asset Protection Trust (DAPT), and off-shore trust. Finally, an analysis will be made as to whether an individual is a good candidate for asset protection planning.



What Strategies Are Available to Protect Assets?

There are a number of strategies available to protect assets. Some are quite simple, and others are complex.


The basic first step for asset protection is insurance.

Auto, Home and Life Insurance. Asset protection begins with obtaining the proper insurance for any given situation. Basic insurance includes automobile, homeowner’s insurance, and life insurance. The purpose of auto insurance is obvious. It is important to have adequate liability insurance on the automobile policy in case serious injury is caused to a third party. Homeowner’s insurance is important not only to replace the home and contents, if there is a fire, but equally as importantly to protect against liability if someone is injured on the property. Life insurance is critical to help protect assets in the hands of surviving family members. Life insurance proceeds are generally free from claims of creditors.

Personal Umbrella Policies. Personal umbrella insurance is extremely inexpensive. A personal umbrella insurance policy supplements the liability limits on standard policies. The insurance company issuing the umbrella policy will have certain minimums for the underlying policies and will cover liability in excess of those limits. Very few people have personal umbrella policies, and those that do usually obtain the default policy of $1,000,000. It makes sense to analyze what potential losses might be and then determine how much umbrella insurance should be obtained. In addition to determining the potential future losses, the individual should take into account personal net worth.

  • Malpractice Insurance

    Every professional should have adequate malpractice insurance.  The amount of the insurance will depend on the professional’s exposure to risk.

  • Fire, Casualty and Liability Insurance

    If commercial real estate is owned, fire and casualty insurance, together with liability insurance, is important.

  • Officer’s and Director’s Liability Insurance

    For business owners or individuals serving on boards of directors of for-profit entities, and non-profits, it is essential to obtain officer’s and director’s liability insurance.  For-profit boards and non-profit boards occasionally make decisions that cause harm to others.  Not only are the entities subject to suit, but the officers and directors who made those decisions are also frequently targets of litigation.  By obtaining appropriate officer’s and director’s liability insurance, this risk can be minimized or eliminated.

  • Business Interruption Insurance

    When casualties force the closing of a business for a period of time, the expenses of the business frequently do not stop.  Mortgages and other loans must be repaid.  Often, the business wants to pay its employees in order to retain them.  Business interruption insurance is available to provide operating monies even while the business is not operating.

Titling of Assets

Proper titling of assets can be a useful strategy in asset protection planning.

  • Titling Assets in Name of Spouse

    Litigation-prone professionals or business persons may choose to title the bulk of their family assets in the name of their spouse.  This may offer some creditor protection, but it could hinder estate planning.  Since the advent of higher federal estate tax exemptions and portability of those exemptions, titling assets for estate tax planning is less a consideration for some individuals than it was previously.  Another drawback is that titling assets in the name of one’s spouse can cause complications if there is a divorce.

  • Titling Assets in Name of Trust

    If assets are transferred to a revocable trust, no creditor protection is obtained because the grantor of the trust reserves the right to revoke the trust and reacquire the assets. If assets are transferred to an irrevocable trust, no creditor protection is obtained because assets in a self-settled irrevocable trust are considered available for claims of creditors. The only exception is irrevocable trusts established in a state having legislation providing for DAPT. Neither New Jersey nor Pennsylvania has such legislation. The Second Restatement of Trusts states, “Where a person creates for his own benefit a trust with a provision restraining the voluntary or involuntary transfer of his interest, his transferee or creditors can reach his interest.” However, residents of New Jersey and Pennsylvania may establish a DAPT in states that have legislation authorizing such trusts.

  • Transfer to Children

    Assets can be titled in the names of children. The problem is if the children are subject to claims of their own creditors, the transferred assets are at risk. If the child is divorced, there may be claims by the son-in-law or daughter-in-law, and if the child is holding those assets, the transferred assets may disqualify the grandchildren from receiving financial aid for college. If assets are transferred to children, the transfers must take place in advance of the claim or incident that may result in a claim in order to avoid the Fraudulent Transfer Act.

  • Homestead Exemption

    All states, except New Jersey and Pennsylvania, have some form of homestead exemption protecting all or some of the value of the primary residence from creditors.  Five states, including Florida, protect the entire value of the home while others protect up to a certain amount, often $500,000.  Individuals must be legitimate residents of the state in question and must take steps to legally establish that residence.

This means that while a creditor may obtain a judgment that would affect the title to the home, the judgment cannot be enforced so long as both spouses are living and residing in the home as a primary residence. If the non-debtor spouse dies, the home then automatically goes to the debtor spouse and the judgment can be enforced at that time. The other potential problem with tenancy by the entirety is that frequently loans made to professional or business persons require the signature of the spouse. In case of a default in those loans, a judgment could be obtained against both spouses and the judgment could be enforced against tenancy by the entirety real estate. Another downside is that there would be a restriction on transferring the home, if there were a judgment against the business or professional person, because the judgment would have to be paid at that point.

However, there are some exceptions to the tenancy by the entirety rule. For example, a spouse’s interest in tenancy by the entirety property is subject to federal tax lien under I.R.C. §6321.

Tenants by the Entireties

In the case of married couples, the primary residence can be titled as “tenants by the entireties.”

What Are My Retirement Plan Options?

Generally, there are two types of retirement accounts:  ERISA plans and IRAs.

  • ERISA Plans

    ERISA plans include employer-sponsored 401ks and defined benefit and defined contribution plans.  These include both pension plans and profit-sharing plans.  ERISA plans provide protection against all types of creditors.  It should be understood that while creditors cannot assert a claim against funds while they are in the retirement account, they can make a claim on any distributions.

  • IRAs

    Creditor protection afforded to IRA accounts depends on state statute.  In New Jersey, IRA accounts are protected against the claims of creditors.  In Pennsylvania, protection for IRAs is limited to contributions made more than one year prior to the debtor filing for bankruptcy.  The funds are protected while they are in the account, and distributions from the account are also protected.  If the distribution is deposited into the IRA beneficiary’s regular account, the protection would end.  

    Under the Federal Bankruptcy Act, federal bankruptcy provides complete protection if the IRA is a rollover from a qualified ERISA plan.  Under federal bankruptcy law the protection is limited to $1,000,000 if the IRA is not a rollover from an ERISA plan.  An inherited IRA is not protected under federal bankruptcy law.

Assets Used in Profession or Business

There are a number of business entities that provide protection of business assets from claims of creditors.  These include corporations, LLCs and LLPs.  In utilizing these entities, it is often useful to establish separate entities for separate purposes.

  • Corporation

    A corporation, properly operated, should protect business assets from claims of business creditors.  While it is possible under certain circumstances to pierce the corporate veil, this is fairly difficult for a creditor to do.  The trap for the unwary with the corporation is to establish the corporate entity, then to borrow money to fund the capital requirements of the corporation and/or operating expenses, and then to have shareholders personally guarantee the corporate loan.  The establishment of the corporation, as a general rule, will limit the liability for corporate acts to corporate assets.  However, the personal guarantee will expose the assets of the guarantors to claims of the creditor on that particular loan or loans.

  • Limited Liability Company (LLC)

    For all intents and purposes, an LLC offers essentially the same creditor protection as a corporation with the same trap for the unwary (i.e., personal guarantees). 

  • Limited Liability Partnership (LLP)

    Limited Liability Partnerships offer significant protection for limited partners.  However, the general partner is exposed to claims of creditors.  A general partner has unlimited liability for acts of the partnership.  A solution to this problem is to form a corporation to serve as general partner.

A corporation might be formed to operate a business while a separate LLC might own business equipment and another LLC might own business real estate. Equipment and real estate could be leased to the corporation operating the business. The claim against one entity may not jeopardize assets owned by separate entities.

It is critical in operating separate entities that funds not be mixed between or among those entities. Funds generated by the operating company must remain in the operating company. Funds generated by the leasing companies must remain separate in the leasing companies. If the operating company runs low on money, it should not borrow from the leasing companies.


A good strategy is often to use separate business entities to own separate business assets.

Domestic Asset Protection Trusts

Seventeen states have adopted legislation authorizing DAPT.  These include the following:  Alaska, Colorado, Delaware, Hawaii, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming.  Statutes in each of these states vary.  For purposes of this discussion, it will be assumed that the DAPT is established under the laws of Delaware.

Basic Trust Requirements - The DAPT must be:

Irrevocable. The trust must be irrevocable.

Spendthrift Clause. The trust must contain a spendthrift clause.

Situs. The situs of the trust must be Delaware for purposes of determining the trust’s validity, construction and administration.

Trustee. The trust must appoint at least one Delaware trustee.

Custody. The assets must be custodied by the Delaware trustee in Delaware.

Records. The Delaware trustee must maintain records for the trust.

Basic Trust Requirements - The DAPT must be:

Fiduciary Income Tax Returns. The Delaware trustee must prepare or arrange for the preparation of fiduciary income tax returns.

Trust Administration. The Delaware trustee must materially participate in the administration of the trust.

Resident Trustee. The trustee must either be an individual who resides in Delaware or a corporation that is authorized to conduct trust business in Delaware and is regulated by the Delaware banking commissioner or a federal agency.

Claims. Any action to enforce a claim against a Delaware DAPT must be brought in the Delaware Court of Chancery. The Act also bars original actions and actions to enforce judgments, including judgments entered elsewhere.

Creditors Against Whom the Trust Does Not Offer Protections

There are certain super creditors established under federal law, which trump state law.  Super creditors include, but are not limited to:

  • The Internal Revenue Service (IRS);
  • The Securities and Exchange Commission (SEC);
  • The Federal Trade Commission (FTC);
  • Children seeking child support; and
  • Alimony/Equitable Distribution.  Only a spouse married to the grantor before the trust was created may invoke this exception.

Income and Principal

The grantor of a Delaware DAPT may have the following:

  • Income and Principal. The ability to receive income and principal pursuant to a broad discretion or a standard determined by the Delaware trustees.
  • Current Income. The right to receive current income distributions.
  • Power of Appointment. A Special Limited Testamentary Power of Appointment.
  • Payments on Death. The ability to provide for the payment of debts, expenses, and taxes on death.

Grantor-Retained Powers

The grantor of a Delaware trust may retain the power to:

  • Consent to or direct investment changes;
  • Veto distributions;
  • Replace trustees or advisors; and
  • Designate an investment manager.


The grantor of the Delaware DAPT may not serve as Trustee. While individuals other than the grantor may serve as co-trustee even if they are not Delaware residents, the downside is that this may increase the ability of creditors to serve process in other states, and the possibility that a court may find that Delaware law does not control.

Domestic Asset Protection Trusts

Special Needs Trusts

A Self-Settled Special Needs Trust (SSSNT) is subject to the same treatment as any other assets under the theory expounded the Second Restatement of Trusts set forth above. If creditor protection is a concern, the SSSNT can be wrapped into a DAPT. A South Dakota court held that a trust created with funds received as a personal injury award was self-settled and, therefore, ineffective against the beneficiary’s creditors.

Structured Settlements

While generally a structured settlement is immune from claims of creditors, a court found that a structured settlement was not excludable from bankruptcy under §541(c)(2) of the Bankruptcy Code. The court found that the fund was a self-settled trust and that it was not effective under Washington law. Similarly, a federal bankruptcy court in Illinois held that an annuity received in connection with a personal injury award was not excludable from the debtor’s bankruptcy estate.

Income Tax

If a Delaware DAPT is established as an irrevocable non-grantor trust without a Delaware beneficiary, the income accumulated and capital gains incurred for the non-resident will not be subject to Delaware income tax.

Investment Management

Many individuals are concerned with who will manage the funds in the trust.  There are three choices in a DAPT:  (1) the trustee can manage the funds; (2) the trust can designate the grantor as the investment manager; or (3) the trust can designate a third party, selected by the grantor, to be the investment manager.


Situs. With respect to situs, the Delaware Supreme Court declared in 1947 that, “In determining the situs of a trust for the purpose of deciding what law is applicable to determine its validity, the most important facts to be considered are the intention of the creator of the trust, the domicile of the trustee, and the place in which the trust is administered.”  In New Jersey, which has adopted the Federal Grantor-Trust Rules, the tax can be avoided by having the grantor agree to limit distributions to himself subject to approval of an adverse party.  To avoid this income or capital gains tax, a Pennsylvania resident must use a type of Delaware DAPT known as a Delaware Incomplete Non-Grantor Trust (DING Trust).  This is because Pennsylvania has not adopted the Federal Grantor-Trust Rules.

What About Offshore Trusts?

While arguments can be made that off-shore trust provide advantages unavailable under a DAPT, there are also risks attendant in an off-shore trust. When establishing an off-shore trust, assets must be moved to that jurisdiction, such as the Cook Islands or the Cayman Islands, to insulate them from creditors. This is expensive and involves many logistical hurdles. Law of the foreign jurisdiction controls, which gives the advantage that the Full Faith and Credit Clause of the United States does not apply. Laws of those jurisdictions are specifically designed so that a creditor must file suit in the foreign jurisdiction under those laws and laws in these jurisdictions make it very difficult for a creditor to obtain a judgment. Trustee powers are very broad, which makes it difficult for a creditor to collect from trust assets. The problem is that trustees are often non-compliant, and there are instances where grantors of these trusts have been incarcerated for failure of the foreign trustee to comply with orders of U.S. courts.


Divorce often subjects assets of a professional or business person to claims of the divorcing spouse.

Elective Share. It appears clear that the spouse of a Delaware decedent is unable to reach assets in a Delaware DAPT by asserting rights to an elective share. Delaware law does not defer to the decedent’s domicile to determine the surviving spouse’s elective share rights, so it is likely that the Delaware DAPT would offer protection against elective share rights even if the grantor of the trust was a resident of New Jersey or Pennsylvania.

Prenuptial Agreement. Even better insurance against a claim for an elective share is a valid prenuptial agreement.

Separate Spousal Assets. If an individual enters a marriage with significant assets and never commingles them with marital assets and never uses the income or those assets to fund the marital lifestyle, courts may find that these assets should be excluded from consideration as martial assets.

Inherited Assets. Inherited assets, including stock portfolios, vacation homes, etc., may also be protected so long as they are not commingled with other marital assets.

Discretionary Irrevocable Trust. If assets that have never been marital assets are placed in an irrevocable discretionary trust with a third party trustee, this would reduce the chances that assets will be considered to have supported the marital lifestyle and, thus, classified as marital property. If the parent leaving the inheritance establishes the trust, the protection is significantly greater.

Both New Jersey and Pennsylvania follow the Uniform Fraudulent Transfer Act.

Timing is the key to implementation of an effective asset protection planning strategy. Both New Jersey and Pennsylvania follow the Uniform Fraudulent Transfer Act. The versions differ slightly, but essentially they provide that:

With respect to present or future creditors a transfer by a debtor is fraudulent as to a creditor whether the creditor’s claim arose before or after the transfer was made, if the debtor made the transfer:

  • With actual intent to hinder, delay, or defraud any creditor of the debtor; or
  • Without receiving a reasonably equivalent value in exchange for the transfer, and the debtor:
    • Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
    • Intended to incur, or believed or reasonably should have been believed that he would incur, debts beyond his or her ability to pay as they became due.

There is a statute of limitation for bring fraudulent transfer claims. Generally, a cause of action for actual fraud is extinguished unless an action is brought within four years after the transfer was made or, if later, within one year after the transfer was, or could reasonably have been discovered, by the claimant. This means that implementation of asset protection strategies are governed by this rule. Many, if not most, individuals want to implement asset protection strategies after a claim has already arisen or an incident has occurred that appears likely to give rise to a claim. At that point, the Fraudulent Transfer Act applies and it is too late to implement these strategies.

In transferring assets to a DAPT, an individual is required to execute an Affidavit of Solvency to the effect that the individual has sufficient assets remaining after transfer to the trust to take care of all foreseen expenses.

Are You a Good Candidate for Asset Protection Strategies?

There are a number of factors to be considered in answering this question:

  • Risk Analysis. What is the risk that a claim will be brought against you?  Most likely, the claim will be in connection with some activity related to your profession or business, but it could be from other causes.
  • Net Worth. What is the size of your net worth?
  • Implementation. Have you implemented all or some of the asset protection strategies listed above?
  • Willingness to Plan. Are you willing to engage in all or some of the asset protection strategies above?
  • Investment Assets. Do you have significant investment assets outside of your profession or business?
  • Fraudulent Transfer Act. Are you considering implementing these asset protection strategies before a claim has arisen and before an incident that may give rise to a claim has occurred?
  • Control. Are you willing to give up control of a portion of your investment assets by placing them in a DAPT?  It should be noted that not all of your investment assets should be placed in a DAPT.  The assets placed in the trust should be assets that you are not likely to require for living expenses.  While these assets are available in the event of an emergency, good practice dictates that they be invested and grow and that the income be accumulated in the trust.  They are available in an emergency, but should not be used for daily living expenses.
  • Trustee’s Discretion. Are` you aware that you cannot obtain income and assets from a DAPT simply upon request? Distributions from the trust are discretionary with the trustee and certain procedures must be followed.