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Protecting Your Assets

By Paul D. Pearlstein & Lewis J. Saret

Reprinted with permission from The Washington Lawyer, November/December 1995

THE RECENT RECESSION TORE APART the real estate and banking industries and played havoc with our "depression-proof" region. The continuation of corporate and government layoffs, military downsizing, and general budget slashing will touch many of our clients for years to come.

This article describes some of the asset protection techniques that can assist the client in jeopardy. It also highlights some stark differences that exist for District of Columbia, Maryland, and Virginia residents.

Fraudulent Conveyance

Any discussion of asset protection must begin with a caveat regarding fraudulent conveyances. If a client transfers assets solely to hide them from creditors, such a transfer may be avoided and the asset made available to the creditors. The District of Columbia, Maryland, Virginia, and the U.S. Bankruptcy Code all have separate and distinct fraudulent conveyance laws, with different statutes of limitation and different case law interpretations. Uniformity is not the order of the day.

Beyond the transfer avoidance problem is the potential jeopardy to counsel. Aggressive creditors are not wont to bring counsel into a particularly pungent case as a co-conspirator to defraud, for tortious interference with a business, or through other creative causes of action. A recent Virginia bankruptcy case imposed a "crime fraud" exception to the attorney-client privilege and allowed the deposition of the debtor's attorney regarding allegedly fraudulent pre-petition transfers of assets. Even when suit can be avoided, the attorney may be troubled by an ethical attack through Bar Counsel.

Asset protection is proper if done carefully and correctly, but there is a line. Being able to demonstrate that a transfer was made pursuant to some legitimate purpose is critical. If the transfer is only a desperate act immediately preceding the entry of a large judgment, it is not likely to work. The process is similar to the distinction between tax avoidance and tax evasion. Another valid comparison is the difference between a pig and a hog. Careful planning and timely execution are important to the success of any asset protection efforts.

Some Techniques

There is a wide variety of asset protection devices. Some are simplistic, while others are extremely intricate. A quick list for consideration by counsel would include:


For married couples an easy way to protect assets is to hold property as tenants by the entirety. Creditors of only one spouse cannot attack property titled as tenants by the entirety. This unusual protection is available only to married couples.

Although this longstanding rule has been altered in some states, it is still the law in the District of Columbia, Maryland, and Virginia. The main problems locally are (1) whether the rule applies to both real property and personal property; (2) exactly what is necessary to create a tenancy by the entirety; and (3) whether bank accounts, security accounts, certificates of deposit, and government bonds (series EE and HH) can be held as tenants by the entirety.

Real and Personal Property. In D.C. and Maryland both real and personal property may be held as tenants by the entirety. It is clear that real property may be held as tenancy by the entirety in Virginia. It was believed that the same was true of personal property in Virginia from a reading of Oliver v. Givens. However, there have been recent literature and bankruptcy trial court decisions questioning whether personal property can be held as tenancy by the entirety. Until the Supreme Court of Virginia resolves the issue, the question is in play.

In Maryland, Virginia, and D.C. a divorce automatically causes tenancy by the entirety to become a tenancy in common. However, there is some anomalous case law in D.C. that provides for the holding of a tenancy-by-the-entirety property even after a divorce. It is doubtful that this would still be valid if tested.

Proper Creation of a Tenancy by the Entirety. The safest way to hold property as tenants by the entirety is to use the form "X [full name] and Y [full name], husband and wife as Tenants by the Entirety." This form will work in all three jurisdictions. Failure to specify "as tenants by the entirety" is dangerous and probably fatal to any attempt to protect the property.

In D.C. there is a statutory presumption against survivorship, even when the parties are husband and wife.

Virginia also has a statute abolishing survivorship between joint tenants. However, a statutory exception to this rule allows survivorship (and tenancy by the entirety) to exist if the intent is clearly expressed.

Only Maryland, by case law, seems to afford a presumption of survivorship (and tenancy-by-the-entirety status) if the joint tenants are husband and wife. This presumption is consistent with the common law and makes this question much less dangerous in Maryland.

Institutional Accounts and Instruments. The problem with institutional accounts is the printed form presented by the account executives. Tenancy by the entirety is rarely an available selection. The account cards and the computer systems do not include tenancy by the entirety. Joint tenancy with right of survivorship is normally available, but this does not automatically confer the protection afforded by a tenancy by the entirety. If screaming or pleading with the account officer is not productive, at least try to add "husband and wife" after the names on the account to give rise to an inference that that the account is held as tenants by the entirety.

D.C., Virginia, and Maryland all have statutes that protect banks holding joint accounts. These statutes allow a banking institution to pay out a joint account to either party with impunity, but they do not determine the parties' interest as to outside creditors.

In all three jurisdictions, bank accounts, security accounts, and Certificates of Deposit may all be titled as tenancy by the entirety if the institution will allow you to do so. There is no statutory bar to the creation of such an account, and there is statutory recognition of tenancy by the entirety in personal property in D.C. and Maryland.

The case law in Maryland, if followed as to bank accounts, should create tenancy-by-the-entirety status in a bank account if the parties are husband and wife. D.C. and Virginia have both recognized tenancy-by-the-entirety bank accounts where the funds on deposit were sales proceeds from real property that was held as a tenancy-by-the-entirety. However, the law is ambiguous enough in all three jurisdictions that there is no substitute for clearly expressing the intent to hold the account as tenants by the entirety.

Series EE and HH bonds have no provision for tenancy by the entirety designations or joint tenancy with right of survivorship.

Choice of Entity

A client's business operation merits special attention because it may generate liabilities that affect both the business itself and the client's personal assets. Because of this characteristic, planners must give special attention to the choice of entity that clients use for their business operations. The business planner's primary objectives will be limiting the reach of creditors from business operations and protecting the assets of business operations from the reach of clients' nonbusiness creditors. The primary entities that are available for planners to choose from include: corporations; limited partnerships, including family limited partnerships and limited liability partnerships; and limited liability companies.

It should always be recognized that most sophisticated creditors will insist on personal guarantees when extending credit to new entities without track records. This is typical of landlords. The limited liability feature of any chosen entity will do no good if the client must also execute a personal guarantee.


Trusts are among the most useful and flexible asset protection tools. By transferring assets into a trust, title is held by a third party. Consequently, if that transfer is not set aside as a fraudulent conveyance, creditors will be unable to reach the trust corpus. At a minimum, attorneys should be familiar with revocable trusts, irrevocable trusts, spendthrift trust provisions, discretionary trust provisions, and offshore asset protection trusts.

Revocable Trusts. Revocable trusts (e.g., an inter vivos trust) generally provide little asset protection because the grantor's creditors may reach the trust corpus.

Irrevocable Trusts. By transferring property into an irrevocable trust, settlors completely transfer ownership of their property to a third party, the trust itself. Consequently, creditors cannot reach the transferred property because the settlor retains no ownership rights in the transferred property. Planners may generally give clients special powers of appointment without exposing the trust corpus to creditors. The settlor may also retain a lifetime interest in the trust's income. However, creditors may reach such lifetime income interests. For example, under Maryland law, a settlor's creditors cannot reach the trust corpus of an irrevocable trust where the settlor reserves only (1) the right to receive trust income and (2) a special power of appointment at death to appoint the trust corpus. A variation of the irrevocable trust, the irrevocable charitable remainder trust, offers both asset protection and future tax benefits.

Spendthrift Provisions. Spendthrift provisions in trusts prevent beneficiaries from transferring or assigning their rights to future income or principal payments. They also prevent the beneficiaries' creditors from attaching a beneficiary's interest to satisfy creditors' claims. Lawyers have traditionally used spendthrift trusts when settlors believed their beneficiaries were unstable or likely to squander the assets. Today, as many young professionals begin to inherit wealth, their parents may want to transfer their estates via spendthrift trusts that will protect their estates and provide their children with a safety net in the event of a reversal of their fortunes.

The District of Columbia recognizes spendthrift provisions. Attorneys need not use any special language as long as the trust instrument evidences the settlor's intent to create a trust that prohibits assignment by the beneficiary and attachment by creditors. Under District law, discretionary trusts and support trusts also protect assets from The claims of the beneficiary's creditors. However, spendthrift trusts will not protect the trust corpus from claims against settlors who are also trust beneficiaries, claims for the support of a beneficiary's minor children, or debts incurred for necessaries.

Maryland also recognizes spendthrift provisions, protecting both trust income and principal from beneficiaries' creditors' claims. Under Maryland law, discretionary trusts and support trusts also protect assets from the claims of the beneficiary's creditors. However, Maryland spendthrift trusts will not protect the trust corpus against claims (1) upon settlors if they are also trust beneficiaries; (2) for alimony and child support; (3) of a beneficiary's creditors if the beneficiary has the power to withdraw trust assets upon demand; or (4) of the Internal Revenue Service for income taxes.

Virginia statutorily recognizes spendthrift provisions up to $500,000 in value. This $500,000 limit applies to all beneficiaries taken together. Under Virginia law, discretionary and support trusts also protect assets from the claims of the beneficiary's creditors. However, Virginia spendthrift trusts do not protect the trust corpus against the following: claims of the United States, Virginia, or any county, city, or town; state claims for reimbursement for public assistance, including medical assistance, furnished to the beneficiary, other than beneficiaries with disabilities; and claims against settlors who are also beneficiaries, subject to certain limitations.

Virginia law also invalidates Virginia trusts that grantors create for their own benefit that purport to suspend or terminate the beneficiaries' interest if they apply for medical assistance or require medical, hospital, nursing, or custodial care.

Discretionary Provisions. Discretionary trusts give trustees discretion to pay or apply to or for the beneficiary's benefit, any, all, or no trust income or principal as they deem appropriate. Because the beneficiary has no legally enforceable right to anything, creditors cannot reach the trust corpus. However, to be effective, discretionary trusts must be purely discretionary; with no ascertainable standards which could be construed to compel distribution. This obviously requires that the settlor have absolute trust in the trustee. As previously noted, discretionary trusts will protect the trust corpus from the beneficiary's creditors in all three jurisdictions.

Offshore Asset Protection Trusts. Offshore asset protection trusts have attracted a great deal of attention even though they are appropriate only for the wealthy patron. Offshore trusts are trusts that settlors establish in foreign jurisdictions that have enacted laws that protect trust assets to a greater extent than does United States law. The key to establishing an effective offshore trust is choosing a jurisdiction with one or more of the following trust-friendly characteristics:

A few countries that currently satisfy the criteria are Bermuda, the Cayman Islands, the Cook Islands, the Isle of Man, and the Bahamas.

Exemptions (see also new exemptions)

The federal government and every state exempt certain types of property from the reach of creditors. Some of the most important exemptions are the following: homestead exemption; life insurance; ERISA-qualified retirement benefit plans; individual retirement accounts and certain other nonqualified plans; and proceeds from personal injury claims.

A debtor is permitted to convert nonexempt property to exempt property before filing a bankruptcy petition. Within reasonable limits and without actual fraud, the practice is not fraudulent as to creditors, and it permits the debtor to make full use of the exemptions to which he is entitled under the law.

[N.B. The law regarding exemptions in the District of Columbia changed in April of 2001. The following outlines the old law. For a discussion on the new law, please see my article, Exemption Planning As A Tool To Protect Assets, available on this web site.]

Homestead Exemption. Most states have enacted homestead exemption statutes that partially protect an individual's home from the reach of creditors under certain circumstances. Many clients have heard of homestead exemptions and assume that they exist in their jurisdictions and completely protect their homes (e.g., Florida and Texas). Unfortunately, this is generally not true, especially in the Washington metropolitan area.

Neither the District of Columbia nor Maryland has any homestead exemption per se. However, Maryland does allow a debtor to exempt an interest in any property up to $3,000 and an additional $2,500 in the bankruptcy context.

The Virginia homestead exemption excludes up to $5,000 of real or personal property plus $500 for each dependent of the debtor. This exemption also extends to property that is acquired with homestead sale proceeds. Disabled veterans may be entitled to additional homestead exemption benefits. Debtors must comply with the procedural requirements of the Virginia Code and must sign and record a homestead deed in order to obtain this protection. The Virginia homestead exemption does not protect the homestead property from debts for the property's purchase price, or from spousal or child support obligations.

Life Insurance. The District of Columbia exempts individual life insurance proceeds from claims of creditors and representatives of the insured and the person effecting the policy. However, the beneficiary must not be the insured or the person effecting the policy. The District's exemption applies without regard to whether the person claiming the exemption reserves the right to change beneficiaries or whether the insured is a contingent beneficiary of the policy.

The District completely disallows its exemption for assignments made with the intent to defraud. It also limits its exemption where owners buy policies intending to defraud creditors. In such cases, creditors may reach the policies' proceeds, but only to the extent of premiums paid with the intent to defraud creditors.

The District also exempts group life insurance policies and proceeds when paid to employees. It even provides that when not made payable to a named beneficiary, group life insurance proceeds do not become part of such employee's estate for purposes of paying debts.

Maryland exempts life insurance proceeds in the hands of an insured's spouse, child, or dependent relative. This exemption also protects against all claims of the insured's creditors. Moreover, it applies even if the insured may change the beneficiary. However, it does not protect life insurance proceeds against debts for which the insured has pledged the policy as security.

Maryland also provides a separate exemption for money payable from insurance (or any other source) in the event of any person's death, sickness, accident, or injury, without regard to the beneficiary's identity.

Virginia exempts life insurance proceeds of assignees or beneficiaries. However, clients must satisfy the following conditions to use the Virginia life insurance exemption:

Under Virginia law, creditors can reach life insurance proceeds to the extent of premiums paid with the intent to defraud creditors. If the policy's owner reserves the right to change beneficiaries, the policy's cash surrender or loan value will be subject to the claims of creditors but the exemption will cover its proceeds.

Virginia also exempts group life insurance and its proceeds from attachment, garnishment, and other legal process.

Virginia gives spendthrift trust treatment to life insurance proceeds under certain circumstances. First, if the policy's terms provide that the insurer will retain the proceeds and withhold "permission," then beneficiaries cannot alienate or assign that policy. Also, if the policy's terms or a written supplemental agreement so provide, Virginia law precludes any of the policy's interest or principal payments from being subjected to a beneficiary's debts, judicial process, levy, or other attachment, up to $500,000.

Even if the insured's creditors prove that premium payments constituted fraudulent conveyances, such creditors cannot reach life insurance death benefits except to recover the value of the premiums fraudulently paid. However, if the insurance policy's assignee or payee is the executor or administrator of either the insured or the person effecting the policy, the proceeds will be subject to the claims of creditors of the insured or the person effecting the policy.

Federal Protection of ERISA-Qualified Retirement Benefit Plans. Qualified plans must be established as trusts and both the Employee Retirement Income Security Act and the Internal Revenue Code require such plans to contain anti-alienation or spendthrift provisions. The Supreme Court has held that restrictions on the beneficiary/debtor's transfer of beneficial interests in a qualified retirement plan trust are enforceable. Consequently, the Court held, a debtor's interest in an ERISA-qualified plan is excluded from the property of the bankruptcy estate. Thus, ERISA-qualified-plan assets cannot be reached in a bankruptcy proceeding. This protection extends to I.R.C. § 457 deferred compensation plans of state or local governments, and to federal civil service retirement benefit plans.

A different result occurs for nonqualified plans and for individual retirement accounts (IRAs) for which ERISA does not mandate an anti-alienation provision. Specifically, such plans do become part of the bankruptcy estate because they do not contain an ERISA-mandated anti-alienation provision. Moreover, planners should note that small ERISA-qualified plans in which only the client and his spouse participate may be considered nonqualified plans and subject to attack by creditors.

When clients roll over their qualified plan benefits into individual retirement accounts or other nonqualified plans, they lose the protection accorded such ERISA-qualified plans under federal protection. Some states have taken steps to protect IRAs and avoid this result.

Even qualified plans do not protect assets from tax claims or claims of the client's spouse, children, or other dependents, who may obtain a qualified domestic relations order to reach plan assets.

In the nonbankruptcy context, ERISA preempts state law. Therefore, clients' interests in qualified plans are generally protected from their creditors' reach.

State Protection of Retirement Benefit Plans. Many states have enacted exemption statutes that cover IRAs and other retirement benefits. Unfortunately, the District of Columbia offers no real protection for an IRA.

D.C. does exempt retirement plan payments, up to $200 per month, for two months preceding the issuance of a writ of process for a principal support of a family or $60 per month for two months preceding the date of attachment for all other persons. Also, the District includes periodic pension or retirement plan payments within its definition of "wage", for purposes of its partial exemption from garnishment. The D.C. exemption law regarding retirement benefits is disgraceful. Unless covered by an exemption under certain public employee retirement plans, such as judges' and teachers' retirement benefits, retirement income is, completely exposed to creditors' claims.

Maryland exempts from creditors' claims any interest that a participant or beneficiary has in any of the following:

Maryland's exemption does not apply to any of the following:

Virginia exempts retirement plans intended to qualify under any of the following I.R.C. provisions:

[Since 2007 Va Code 34-34 B exempts Individual Retirement Accounts in the same manner as the federal bankruptcy code allows. Currently $1.095,000 is exempt per 11 U.S.C. 522(n)]

Proceeds From Personal Injury Claims. The federal Bankruptcy Code, II U.S.C. § 522(d)(I 1)(D), protects only $15,000 of bodily injury recovery and does not include pain and suffering or compensation for actual pecuniary loss.

In D.C. there is no protection from creditors for recovery from personal injury claims.

In Maryland Md. Code Ann. [Cts. & Jud. Proc.] § 11-504(b)(2) offers a full exemption for recoveries resulting from accident, injury, or death.

In Virginia Va. Code Ann. § 34-28.1 fully protects all recovery for claims for negligence and tortious conduct.


One asset protection device that is immediately effective, but only temporary, is bankruptcy. Unlike a normal law suit where the relief comes long after the filing, bankruptcy relief is automatic and available by the mere filing of the case. The filing of a Chapter 7, 11, 12, or 13 will automatically stop a lawsuit, eviction, and judgment execution. The filing will also stop the running of interest on unsecured and undersecured debts, stop litigation, and freeze a claim as unsecured before it becomes a judgment lien.

Bankruptcy may not solve a debtor's cash flow problems but it certainly presents a new opportunity to level the playing field. Bankruptcy may be used as a prophylactic tactic, but it is more often used as an emergency device when there is no time to plan or otherwise protect assets.

Please note that in D.C. bankruptcy cases clients must choose between the more liberal federal bankruptcy exemptions and parsimonious local exemptions. If the client elects to use D.C. exemptions, tenancy-by-the-entirety property is protected from creditors of only one spouse. But if the client elects the federal bankruptcy exemptions, a trustee in bankruptcy may partition the tenancy-by-the-entirety property to recover funds to pay the creditors of a single spouse.


Asset protection should be considered in every legal matter, from transactional work and litigation to pre- and postmortem estate planning. There is seldom only one solution and often there may be no solution. The problems are difficult and the problem-solving procedure focuses the mind because both the client and the attorney may be at risk. The downside often is financial ruin, suicide, or disgrace and jail. The upside can be solvency, blissful relief, and the most important service any lawyer can provide a client.

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