Level 1: State and Federal Exemptions
The simplest form of asset protection planning is to maximize the debtor's use of state or federal statutory exemptions from collections. Certain property may be entirely exempt while the exemption for other property may be limited to a certain dollar amount. The following asset categories are protected by either the State of Michigan or the federal government.
Entireties Properties. Certain kinds of property, if properly titled in the name of a husband and wife together, cannot be reached by the creditors of one spouse alone. Entireties properties include any real estate in Michigan (and the rents therefrom), bonds, certificates of stock, mortgages, promissory notes, debentures and membership interests in limited liability companies. However, joint bank accounts and brokerage accounts are not protected.
Life Insurance and Annuities. If the debtor's spouse or children are the beneficiaries of a policy owned by the debtor, the cash value and the death benefits that are available under the policy are not reachable by the debtor's creditors - even though the debtor has the right to cash in the policy. However, the statute protecting life insurance dates back to 1957 - well before the advent of universal and variable life insurance policies designed partially as investment vehicles. Therefore, it is not clear whether these newer policies would be protected by the exemption. Moreover, two cases decided under Michigan law have permitted creditors to attach cash values of policies. Chrysler First Business Credit Corporation v Gary A. Rotenberg, U.S. District Court, Eastern District, Case No. 91-71274 (Feb. 25, 1992), and Schenk Boncher & Prasher v Vanderlaan, No. 237690 (Kent County Circuit Court, LC No. 99-011906CZ). As a result, it may be advisable to have life insurance policies owned by an irrevocable trust (see below). Michigan law also provides a general exemption for annuities purchased for the benefit of any person other than the insured.
Retirement Plans. Federal bankruptcy law provides full exemptions for contributions to pension plans, profitsharing plans, 401 (k) plans, 403(b) plans, and Section 457 deferred compensation plans - whether the debtor elects state or federal bankruptcy exemptions. Bankruptcy law also shields assets held in SEP-IRAs, Simple IRAs, traditional IRAs and Roth IRAs. Therefore, an individual can roll assets from a qualified plan to an IRA with full protection from creditors. The amount of protected traditional IRA and Roth IRA assets is limited to $1 million (adjusted for inflation). By keeping two separate IRAs, it will be easier to identify IRAs with unlimited protection (rollover) from those subject to the $1 million limitation (traditional and Roth IRAs).
When funds are withdrawn from a retirement plan, including required minimum distributions, they are no longer protected. In addition, federal bankruptcy law applies specifically to bankruptcy. It does not apply to judgments awarded in state courts. However, in a non-bankruptcy context, Michigan law protects one IRA (including a rollover IRA) along with all qualified retirement plans.