Understanding Exemption Planning
Most exemptions are based on state laws, although some assets are also exempt under federal law. Assets considered ‘exempt’ are generally safe from creditors, even though they’re still owned by the individual. The nature and degree of asset protection vary from state to state. Bankruptcy, a unique situation, has its own set of exemptions, which may involve state and/or federal laws.
Typical exempt assets include home equity, wages, pensions and retirement accounts, profit sharing plans, annuities and insurance, certain household items, tools of trade, burial plots, and certain personal possessions such as jewelry.
However, exemption laws are complex and filled with exceptions, caveats, and conditions. An asset considered ‘exempt’ might not always be exempt from all creditors, and this is where professional asset protection planners play a crucial role.
In the event of bankruptcy, exemption rules change considerably. While planning for exemptions, the likelihood of declaring bankruptcy in the future must be considered. Even if it seems unlikely, contingency planning is necessary.
State vs Federal Exemptions
Depending on state law, one may use state exemptions only or choose between state or federal exemptions during bankruptcy. However, you cannot use both. In bankruptcy, the federal exemption amount can be doubled for a married couple, but this might not be the case with state exemptions. Shifting to a state with more favorable exemptions before filing bankruptcy can work, but only if the move is made at least 730 days (about two years) before filing.
Exempt property is shielded by law from creditor liens. Effective utilization of state and, if applicable, federal asset exemptions is a crucial strategy to protect assets from seizure by creditors. Each state has a list of ‘exempt’ assets, but no state has a single dollar exemption covering all property. The exemptions are more like ‘pigeon holes’, and the challenge is to fit as many items of property as possible into them.
State asset exemption statutes differ vastly, with some being more generous than others. The federal rules, on the other hand, are more straightforward. Federal asset exemptions are available only if you file for bankruptcy and if your state permits using federal exemptions.