By Dr. James M. Dahle, WCI Founder
I haven't written about asset protection very often on this blog over the years, despite the fact that I expected to write about it frequently when I first started blogging. However, as I dove into the subject, I realized the likelihood of an above policy limits judgment that was not reduced on appeal was so low (although not zero) that it just wasn't a very important subject for my readers or myself.
I've become somewhat more interested over the years as the gross amount and the percentage of my assets not protected by state exemptions grew. This process has become particularly acute the last few years as I now invest the majority of my money in taxable accounts and we underwent a home renovation that will significantly increase the value of my house, neither of which receive significant protection in Utah.
It doesn't help my mindset to realize that I now have more to lose than I will ever make practicing medicine. So you might just see a few more asset protection posts around here, after all, as I share what I learn with you.
I was introduced to two asset protection techniques recently that I had not previously heard of and I suspect most of you haven't either. So let's discuss them today.
Delaware Bank Accounts Are Exempt from Attachment by Creditors
About 150 years ago, Delaware passed a law that is still on the books. 12 Del. C. § 3502(b) reads:
Banks, trust companies, savings institutions and loan associations, except only as to a wage attachment against the wages of an employee of the bank, trust company, savings institution or loan association, shall not be subject to the operations of the attachment laws of this State.
What does this mean? That means your creditors aren't supposed to be able to “attach” themselves to your assets in a Delaware bank. Although most think this law was originally designed to protect the banks themselves, it seems to be extended to their depositors and there is some case law to back them up, particularly Provident Trust v. Banks and Delaware Trust Company v. Partial. Some limitations were described in Garretson v. Garretson however.
Sounds good right? Most of us bank online these days anyway, so why not pick a bank in Delaware. Even if the protection isn't perfect, it's got to be better than nothing, right? Well, it's probably a little better for Delaware residents than the rest of us. Certainly, it is better if the entity owning the bank account (such as a trust) is also in Delaware and the interest paid is reported on Delaware taxes.
One downside of these “jurisdictional” asset protection techniques (such as Cook Islands or other overseas trusts) is that while the court may not be able to reach the assets, it can reach you. It can hold you in contempt of court and put you in jail until you voluntarily withdraw the assets. So unless you're willing to move to the Cook Islands (or Delaware), realize this technique is just another obstacle and not necessarily impervious. But we do have a Delaware bank that advertises with us if you are interested.
State 529 Accounts with Asset Protection
I had an attendee at one of my speaking gigs mention that his asset protection attorney told him to open his 529s in Alaska to take advantage of some additional asset protection. As a general rule, 529s are not protected from creditors. The money technically belongs to the account owner (generally the parent or grandparent) not the student, so it is exposed to their creditors. However, there are some states that do offer some protection, including:
- AK
- AR
- CO
- FL
- ID
- IL
- KS
- KY
- LA
- ME
- MD
- NE
- NV
- NJ
- NY
- ND
- OH
- OK
- OR
- PA
- RI
- SC
- SD
- TN
- TX
- VA
Florida's protection appears to be particularly strong. Note that some states, including FL, TN, and TX don't even require you to use their state's plan to give you that protection. Alaska's protection is pretty good, but I've never found it to be one of the top 529s out there from an expense or investment option perspective (for instance, expense ratios are in the 0.3%-0.7% range in these T. Rowe Price funds), but since these plans are always improving as they compete with each other, perhaps it will become better over the years. As I look at that list, I do see two plans I would consider “top plans” on it, the NV plan (which is run by Vanguard which makes it really easy to manage it since you likely already have a Vanguard investing account) and the NY plan which also boasts low costs and good investments.
Since about half the states don't offer a state tax deduction or credit for using their plan (and several give you the same tax break whether you use their plan or not), if you are in one of these states you might as well use the best out-of-state plan you can find. But if asset protection is a big concern, perhaps you'd prefer the Nevada or New York plan to the other top plans like Utah or California.
[Update 2021: 529s and Coverdell Educational Savings Accounts (ESAs) where the beneficiary is your child or grandchild now receive significant asset protection under Federal law. Up to $5,000 per beneficiary of contributions made at least one year ago are protected and 100% of contributions made at least 720 days ago are protected from creditors in bankruptcy.]
Which States Protect HSAs?
This post is still a bit on the shorter side, so let's throw some bonus material in here. If you can go out of state for bank accounts and 529s, why not do it for HSAs too? There are a few states that offer some asset protection benefits for HSAs, including:
- FL
- IN
- MN
- MS
- MT
- OR
- TN
- TX
- VA
- WA
But this protection seems to be for residents in those states who open HSAs, not for HSAs located in those states. Even if that were the case, I do not believe either of my two top recommended HSAs for investing (Fidelity and Lively) are located in those states (Fidelity is headquartered in Boston and Lively is in San Francisco). At any rate, it is very clear that there is no federal protection for HSAs (see In v. Leitch). It's pretty much a taxable bank or brokerage account as far as the feds are concerned.
Should You Move Money Out of State for Asset Protection?
So what's the bottom line? What should you do?
Well, I'm not opening a bank account in Delaware any time soon. My banks are in Texas, Utah, and Michigan. But if you are going to open a Delaware trust or LLC for some reason, it seems to me a good idea to put its bank account in Delaware.
I'm also going to continue using the Utah 529 for my full contributions. I get a tax credit for the first $4K I put in every year and I don't want to deal with the hassle of having two 529s for each kid. But if I lived outside Utah and my state didn't offer a tax break for contributions, I'd probably use the Nevada (Vanguard) 529 instead of the Utah one. The expenses are about the same and I wouldn't get access to DFA funds, but I'd get the extra asset protection.
I'm leaving my HSA at Fidelity as I don't think it would help anyway. But if I were in one of those 10 listed states, I might be a little more likely to leave money in my HSA while collecting receipts instead of spending from it each year.
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What do you think? Are you taking advantage of any of these “jurisdictional asset protection techniques” for your bank accounts, 529s, or HSAs? Which ones and why? Comment below!
It’s nice to find FL on the good list instead of the naughty list, for a change!
Thanks for the information-I will continue to let the HSA grow- recently, I did take a bunch out of it to pay off old receipts. It just felt less cluttered to do it off. Apart from that, I do not foresee me changing things much. For us in FL, the homestead protection is the most valuable.
FL also has TSM at .02 ER for 529’s.
That’s good to know. I opened mine at Utah since we don’t have a state tax deduction for it anyway.
just an FYI, under the 529 section you list a state as MY. Not sure but I think you’re talking about Montana? which is MT….
The list of states includes “MY” There is no such state abbreviation— I assume it means MARYLAND -which is abbreviated in a way the WHITE COAT INVESTOR (or any doctor) should recognize—–>MD.
Thanks for the correction.
I’m a little confused at the NV 529 creditor protection. Could you clarify if this petition applies to say a CA resident who continues to the NV-VG 529?
Your linked PDF just shows a single checked box for NV but I don’t know how to interpret that. The following link (click Other Features) suggests that creditor protections are only available for a debtor domiciled in Nevada.
https://vanguard.wealthmsi.com/comp529main.php?vang1=97&planid1=96&planid2=
Sounds like you just clarified it to me. Remember the protections are state specific, not plan specific. So a Nevada resident with money in another state’s 529 should have the same protection as a Nevada resident with money in the Nevada plan.
I think that Michigan should be included in the list of states with asset protection for their 529 plans. It is my understanding that both of the state run 529 plans are protected from both the account owners and benificiaries creditors.
http://www.legislature.mi.gov/(S(4tgjnkrdetyda4i4ylp1ypkv))/mileg.aspx?page=getObject&objectName=mcl-600-6023
Bad link. You may be right and if so, thanks for the correction. Keep in mind this is all in nearly constant flux.
IL resident. If I open a 529 plan in another state for instance NV, TX or FL will my 529 plan be protected from IL creditors/malpractice claims? If I use the IL plan it offers good asset protection bc of a clear law in IL protecting the IL 529 specifically. Unclear what kind of protection anyone gets when they have an out of state plan. FL does explicitly protect out of state plans for Florida residents. What does that mean for an IL resident with a FL plan?
Tough questions. Best addressed to an asset protection attorney in IL.
According to this: only the IL plan gives IL residents asset protection: https://www.savingforcollege.com/529-news?plan_news_id=851
I don’t know how the FL thing would work out in the event of a bankruptcy, but it’s beyond me why you’d use the FL plan if you’re an IL resident anyway.
Yes, going with IL makes total sense for me. But it is a useful data point for those in many of the states where asset protection is limited.
To get complete protection from creditors from a Delaware bank you should be a Delaware resident?
Like much of asset protection, it depends. Certainly, a Delaware resident has a little more protection than a non-resident. More info here:
https://www.connollygallagher.com/wp-content/uploads/2018/04/Estate-Plan_Hall_April-2018.pdf
Implications for nonresidents
What does it mean to have deposits
held in a Delaware bank or trust
institution for a nonresident of
Delaware? It has been said that
monies held in a bank are merely
communications whose location
comes down to a conflict-of-laws
analysis.10 Key to the analysis will
likely be a determination of which
state has the “most significant relationship” to the account and the
parties.11 The expectation of the
person opening an account will factor heavily in any such determination. Opening an account at an
institution with locations only within the State of Delaware would certainly provide clarity on the question.12 Doing so, however, is not the
sole means of ensuring the account
is located in Delaware. The institution does not have to be statechartered for the law to apply: A
creditor’s ability to attach an
account at a national or regional
bank when Delaware law applies
will not be preempted by federal
banking law.13
In the case of a trust with a
Delaware non-depository trustee
that arranges for a cash account at
a depository institution in
Delaware, the trust’s situs in
Delaware will weigh heavily in
favor of a finding that the cash
account is in Delaware. Nonresidents establishing Delaware enentities should arrange for a cash
account at a depository institution
located in Delaware rather than
opening the account at a location
outside of Delaware (even if that
institution has locations in
Delaware). After an account has
been opened, other considerations
may apply, for example, how and
where the interest is reported for
tax purposes. If a Delaware trust
or entity is the account holder, its
address should be the one associated with the account. This, in turn,
will often determine the tax reporting.
One of the risks sometimes associated with a non-Delaware resident establishing a Delaware trust
or Delaware entity is that if a case
were brought attacking it in the
local jurisdiction, a judge may
apply the substantive law of the
local forum citing that jurisdiction’s
strong public policy regarding the
particular issue in question to
breach the trust or entity.14 Even
if this were to occur, § 3502 would
still be applied when the creditor
attempted to execute on the judgment against the Delaware
account.15 Therefore, having a trust
or entity hold its cash deposits at a
Delaware bank or trust company
can mitigate against this potential
risk.
I am a Texas resident who established a checking account in the state of Delaware and that bank is state chartered and has no branches located out of Delaware. I received a letter today from a law firm and in short they are asking about my banking details. I know they have tools to locate this info themselves so i will not voluntarily give them information. My question is if the courts in Texas grant them the right to garnish my bank account and they get the writ domesticated in Delaware will my bank then freeze my account and allow them access to my checking account?
Why not ask the bank?
What’s going on that a lawyer is asking for your Delaware banking details? Did you make a potentially fraudulent transfer?