Protecting assets from the claims of creditors has begun to assume a more prominent role in estate and financial planning due to the increasingly litigious nature of society. Potential creditors are all around from the thousands of drivers with whom you share the road to a neighbor who may slip and fall on your property or who may be injured by your minor child. Fortunately, there are a number of planning opportunities available to protect your life savings from the claims of these potential creditors. These range from transferring assets to a spouse who has less exposure to creditors’ claims to sophisticated offshore trust planning. Following are some techniques to consider:

Transferring Assets to Spouse. A person engaged in a business that may result in personal liability, such as a doctor or attorney, will sometimes transfer assets to his or her spouse. Any such transfer should be made with caution as it could convert the property from marital property to the recipient spouse’s separate property in the event of divorce.

Tenancy by the Entirety. Under Illinois law, a husband and wife may own their primary residence in “tenancy by the entirety.” Tenancy by the entirety is a form of joint ownership that provides for rights of survivorship for the surviving spouse. If held in tenancy by the entirety, the residence may not be sold to satisfy any judgment entered against only one spouse, thus protecting the equity in the residence.

Liability Insurance. Homeowners and automobile insurance policies are an important aspect of your financial plan and will provide protection with respect to certain actions that may be brought against you. Nevertheless, exposure remains because of caps on damages that will be paid and limitations on actions that will be covered.

Statutory Exemptions. State and federal bankruptcy laws will exempt certain assets from creditors’ claims. These assets include cash values in life insurance policies, certain qualified plans and IRAs. Transferring assets into these vehicles should provide protection for these assets.

Irrevocable Trusts. An irrevocable trust is an excellent vehicle to shield substantial amounts of wealth from a creditor’s claims. Assets transferred to an irrevocable trust for the benefit of family members should no longer be subject to the claims of your creditors or the creditors of your family members.

Family Partnerships/LLCs. Family partnerships and limited liability companies enable you to transfer wealth to family members while at the same time protecting assets from the claims of their creditors. Assuming the governing documents do not provide otherwise, a judgment creditor of a limited partner of a partnership or a non-voting member of an LLC should not have the ability to force a liquidation of the entity in satisfaction of a judgment.

Alaska/Delaware Trusts. Certain states, such as Alaska and Delaware, have enacted legislation that enables a person to establish a self-settled trust and retain a beneficial interest while at the same time receiving creditor protection. There are strict requirements for establishing such a trust. For example, one Trustee must be a resident of the state and trust records and all or a portion of the trust assets must be located in the state. The legislation authorizing such trusts is somewhat new and, consequently, there is uncertainty with respect to the efficacy of such trusts.

Offshore (Foreign) Trusts. An offshore trust is a trust established in a foreign jurisdiction (e.g., Bahamas, Cayman Islands, Bermuda). The laws in such jurisdictions typically provide greater protection from creditors than do the laws of the United States with regard to trusts in which the grantor retains a beneficial interest. Unfortunately, such a trust requires relinquishing control of assets to a foreign trustee.

The ideal time to implement these strategies is when there are no creditors. Once the creditor is at your doorstep, your ability to implement many of these strategies will be greatly diminished. Often, assets transferred or other steps taken after a creditor appears are deemed fraudulent transfers and the assets are eventually held to be subject to the creditors’ claims. Therefore, in the event you are concerned about protecting your assets from the potential claims of creditors, the sooner you take action the better protected you will be.

Martin P. Ryan is a partner at Burke, Warren, MacKay & Serritella, P.C. in Chicago and represents closely held business owners focusing on tax, trust, estate planning and corporate matters. Ryan can be reached at 312/840-7060 or mryan@burkelaw.com.