Overview
First Tuesday Update is our monthly take on current issues in judgment enforcement. This month we discuss selected topics regarding protecting assets from judgment creditors. Many are familiar with the homestead exemption—that is, a vehicle by which your primary residence can be protected from your creditors, or at least some amount of the value of your home. The amount of the protection varies by state. But this is hardly the only exemption that varies by state. Other exemptions include but are not limited to permitting tenancy by the entireties for real and/or in some cases personal property; the cash value of whole life or universal life insurance policies; and retirement plans (both employer-sponsored plans and non-ERISA plans, such as IRAs). As always, these are general guidelines and each particular situation needs to be analyzed and researched for a particular state.
Tenancy by the entirety is a special class of property ownership that is reserved for married couples. Tenancy of the entirety offers, among other benefits, protection from creditors of one spouse. A creditor of one spouse cannot place a lien or enforce a judgment against property held in tenants by the entirety. The most common form of tenancy by the entirety is to own real property. But every state has its own governing law as to what property may be held by tenants in the entirety. Indeed, some states will even allow personal property, such as bank accounts, to be held titled in this way, while others limit this device to real property. The rules protecting real property held in tenancy by the entirety apply with equal force to personal property, meaning that the creditors of one spouse would be unable to reach assets held in a bank account that is titled and held by tenants by the entirety.
Approximately half the states recognize tenancy by the entirety. Nearly a quarter of those states only permit real estate to be held by tenants in the entirety. Over half of the states that permit tenants by the entirety recognize the status for all property—whether real or personal. Every state has some unique twists. Illinois, for instance, will only recognize tenants by the entirety for a homestead. In Michigan, if joint tenants later become married, the tenancy converts to tenants by the entirety.
Be forewarned, however, the protection offered by tenants by the entirety is not inviolate. If the married couple divorces, or one spouse dies, the protection ends. So, if the spouse who does not owe a debt dies, creditors can reach the asset of the surviving-debtor, who then owns the property wholly.
Another asset that can be difficult for judgment creditors to reach is the cash value of a whole or universal life insurance policy. Like many permanent life insurance policies, whole life or universal life insurance policies can include a "cash value" feature. The cash value feature is a portion of premiums that are invested over time and under certain circumstances can be accessed by the policyholder during his or her lifetime. Many states exempt the cash value from judgment enforcement but the amount of the protection greatly varies among the states. Some states have an unlimited exemption amount of the cash value. Other states limit the amount of the exemption to $500,000, or even as low as a few thousand dollars. This legitimate asset can provide protection against creditors, depending on the relevant state law.
Another category of assets that can be exempt from judgment enforcement is retirement accounts. Many individuals presume that retirement accounts are protected from creditors. And when it comes to employer-sponsored plans that is generally correct as a matter of federal law. Any retirement account that qualifies under ERISA is generally protected. These plans include 401(k) plans, deferred compensation plans, pensions, and profit-sharing plans. But not all retirement accounts are ERISA-qualified, and, accordingly, some types of retirement accounts are not protected from creditors.
A thorough check of state law is critical to analyzing your individual situation and risks. Whatever your specific circumstances, we can help enforce a judgment or advise whether your assets are protected. Feel free to contact us directly with any questions.
