Managing and preserving hard-earned wealth is a priority for many individuals. However, the specter of potential creditors looms ominously, ready to lay claim to our assets at any moment.

Whether it’s the threat of professional malpractice suits, unexpected medical expenses, automobile mishaps, or the complexities of business litigation, safeguarding our financial resources is paramount. 

How can we fortify our nest egg against such threats? 

Home and retirement accounts

For many families, the cornerstone of their estate’s value lies in their home and retirement accounts. Washington’s homeowners are protected by the homestead exemption which shields a residence from claims, typically up to the county’s median sale price for a single-family home in the previous calendar year (refer to RCW 6.13.070). 

Additionally, federal and state laws safeguard qualified retirement accounts and pensions from legal processes such as execution, attachment, garnishment, or seizure (see e.g., RCW 6.15.020). 

As such, a straightforward asset protection strategy involves both owning a home and channeling funds into retirement accounts. 

Insurance

Under Washington law, the proceeds from disability insurance (RCW 48.18.400) and life insurance (RCW 48.18.410) are typically shielded from liability for any debts owed by the beneficiary. Whether it’s affordable term insurance or comprehensive whole life coverage, life insurance presents a versatile tool for safeguarding against not only premature death but also potential creditors.

Additionally, insurance in the form of an umbrella policy can help provide asset protection by shifting the responsibility for payment to the insurance company. It is usually priced inexpensively and provides liability coverage above the limits of your other insurance policies. 

Limited liability company

Washington law allows an assortment of entities that can protect your assets. Corporations, limited liability companies and limited partnerships all offer liability protection so long as corporate formalities are followed (i.e., it is a real business with a business purpose and business operations.). 

The protection offered by an entity like an LLC is protection that, if there is liability against the entity, that liability does not reach assets owned outside the entity (personal liability). 

Generally, all business operations and rental properties should be put into some kind of entity because of the liability protection offered. 

Bona fide gifting 

If you don’t mind giving up control, access, use and in any way reliance on your assets, then a bona fide gift could be an effective asset protection strategy so long as you are not making the transfer in violation of the Fraudulent Transfers Act of Washington under RCW 19.40.041 (essentially so long as you are not making the transfer in an attempt to outwit a creditor). 

For example, a person can gift up to $18,000 per year to a recipient without any reporting requirements. Plus, neither the person giving the gift nor the recipient pays any tax associated with such a transfer. If you are making routine annual gifts to a child, for example, and later become subject to bankruptcy, it is unlikely those gifts could ever be brought back into the debtor’s estate to satisfy creditors.

Asset protection trust

Some states offer domestic asset protection trusts, or DAPTs, which ostensibly protect your assets from creditors. States that have these types of trusts include Nevada, Alaska, South Dakota and others. In Washington, we have very limited options for a person to set up their own trust (a so-called “self-settled” trust) and to claim asset protection for the assets owned by the trust. As such, some planners turn to the DAPT-friendly states, like Nevada, and establish the trust under the laws of that state. The problem with this arrangement is that a Washington court may apply its own laws to any controversy before the court and therefore would potentially allow a creditor to breach the protections offered by the other state. 

Still, trusts can be used in other ways to provide effective creditor protection. Separate from the “self-settled” trust discussed above, a “third-party” trust can provide creditor protection. 

As the name implies, the third-party trust is set up for another person. 

By way of example, a father could set up a trust for a child – so the trust would not be set up for the father himself but for the benefit of a third-party child and not the father. Because the trust is set up and funded by a third party (the father), the child benefits from creditor protections available to a trust. 

In a sense, the child doesn’t own the trust. Instead, the child is simply a beneficiary of the trust.

And, because the child doesn’t own the trust, it generally cannot be used to satisfy the child’s creditors. 

Further, if the assets put into the trust by the father constitute bona fide gifts, as discussed above, the assets in the trust are also unavailable to the father’s creditors. 

Holistic planning

Though there is no magic method to protect your assets, by using a mix of the strategies discussed above, an individual can better manage his or her exposure to creditors.

Beau Ruff, a licensed attorney and certified financial planner, is the director of planning at Cornerstone Wealth Strategies, a full-service independent investment management and financial planning firm in Kennewick.