Simple Asset Protection Techniques in Arizona

Asset protection may be defined as planning intended to preserve assets from claims of creditors in the event of unforeseen and unfavorable developments. It has been said that even the most well off are one lawsuit away from bankruptcy, as the corporate scandals of recent years have illustrated. Asset protection is like tax planning: there is nothing illegal or immoral about arranging your affairs to pay the least amount of taxes or to protect your assets to the maximum amount permitted by law. The asset protection afforded by judicious use of corporations and limited liability companies is familiar to most readers and will not be discussed here. Instead, this article will discuss protections afforded by Arizona law which are readily available.

Foreign Jurisdiction Trusts Are Not A Panacea.
Before looking at Arizona, a word about foreign jurisdiction trusts. I am not enamored by the lure of placing assets in trusts sited in exotic places like the Cayman Islands or the Isle of Man. Too many recent cases have shown that American courts are willing to hold defendants in contempt of court for failing to (or as the defendants argue, being unable to) repatriate assets held in a foreign trust. Many are in favor of asset protection; few are willing to go to jail for it. Other trusts located in selected states such as Delaware, Alaska and Rhode Island, among others, have favorable laws protecting assets placed in trust from the trustor’s own creditors provided certain conditions are met. I am not certain that the cost of structuring a trust in another state and hiring a trustee in that state (which is required) is worth the risk that the trust may not work as planned where the trustor is not resident in that state. In addition, the benefits of such trusts were restricted by the new Bankruptcy Abuse Prevention and Consumer Protection Act.

Some Simple Techniques in Arizona.
Life Insurance and Annuities - As amended by the legislature in the first session of 2005, Arizona law provides significant protection for life insurance and annuity contracts. A.R.S. § 20-1131(A) provides that death benefits of a life insurance policy payable to any person having an insurable interest, other than the owner’s estate, are exempt from the claims of creditors of the owner. Therefore, it is possible to provide for your family and loved ones even if you die with a mountain of debt. Death benefits of insurance are also protected from claims of creditors of the spouse or child of the owner up to $20,000. Under A.R.S. §§ 20-1131(D) and 33-1126(A)(6), the cash surrender value of life insurance is also protected from creditors, in any amount, including creditors of the owner, to the extent the policy has named a spouse, parent, child, sibling or any other dependent family member as a beneficiary for at least two years. Annuities are also granted creditor protection if they have been held for two years and named as a beneficiary any of the family members named above, or even the owner himself. These protections do not apply if the policy has been pledged or assigned to another, or to any payment into the policy which would constitute a fraudulent conveyance (see below).
Qualified Retirement Plans - A tax-qualified retirement plan, including a 401(k) and IRA, is exempt from claims of creditors of the plan participant and beneficiaries, without limitation. The new bankruptcy law may limit the protection afforded IRAs to $1 million. This protection does not apply to amounts contributed within 120 days of filing for bankruptcy.
Personal Residence - A.R.S. § 33-1101 provides that every individual owning real estate, a mobile home or a condominium used as a residence may exempt up to $150,000 of equity in the residence from creditors. Only one homestead exemption may be claimed for a person or married couple. No filing of any paper is necessary to perfect the homestead exemption. In bankruptcy, the new bankruptcy law may apply to limit the exemption to $125,000 in certain cases.
Fraudulent Conveyances - Under Arizona’s Uniform Fraudulent Conveyance Act, a creditor may set aside as fraudulent any transfer, including transfers mentioned above, which were made with actual intent to hinder or delay creditors, or for which the transferor received insufficient value (e.g., a gift) or which rendered the debtor insolvent. The precise circumstances in which the Act applies are quite complex. For this reason, any person contemplating adoption of an asset protection strategy is well advised to see an attorney.

Bob Ciancola

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