Managing and preserving hard-earned wealth is a priority for many individuals. However, the specter of potential creditors looms ominously, ready to lay claim to our assets at any moment. 

Whether it's the threat of professional malpractice suits, unexpected medical expenses, automobile mishaps, or the complexities of business litigation, safeguarding our financial resources is paramount. 

How can we fortify our nest egg against such threats?

Home and retirement accounts

For many families, the cornerstone of their estate's value lies in their home and retirement accounts.

Washington's homeowners are protected by the homestead exemption which shields a residence from claims, typically up to the county's median sale price for a single-family home in the previous calendar year.

Additionally, federal and state laws safeguard qualified retirement accounts and pensions from legal processes such as execution, attachment, garnishment, or seizure.

As such, a straightforward asset protection strategy involves both owning a home and channeling funds into retirement accounts.

Insurance

Under Washington law, the proceeds from disability insurance and life insurance are typically shielded from liability for any debts owed by the beneficiary.

Whether it's affordable term insurance or comprehensive whole life coverage, life insurance presents a versatile tool for safeguarding against not only premature death but also potential creditors.

Additionally, insurance in the form of an umbrella policy can help provide asset protection by shifting the responsibility for payment to the insurance company.  It is usually priced inexpensively and provides liability coverage above the limits of your other insurance policies.

Limited Liability Company

Washington law allows an assortment of entities that can protect your assets. 

Corporations, limited liability companies, and limited partnerships all offer liability protection so long as corporate formalities are followed. In other words, it must be a real business with a business purpose and business operations. 

The protection offered by an entity like an LLC is such that, if there's liability against the entity, that liability does not reach assets owned outside the entity. 

Generally, all business operations and rental properties should be put into some kind of entity because of the liability protection offered.

Bona Fide Gifting

If you don't mind giving up control, access, use, and reliance on your assets, then a bona fide gift could be an effective asset-protection strategy so long as your are not making the transfer in violation of the Fraudulent Transfers Act of Washington. Essentially, you can steer clear of being in violation of the act so long as you aren't making the transfer in an attempt to outwit a creditor. 

For example, a person can gift up to $18,000 per year to a recipient without reporting requirements. Plus, neither the person giving the gift nor the recipient pays any tax associated with such a transfer. If you are making routine annual gifts to a child, for example, and later become subject to bankruptcy, it is unlikely those gifts could ever be brought back into the debtor's estate to satisfy creditors.

Asset Protection Trust

Some states offer domestic asset protection trusts, which ostensibly protect assets from creditors. States that have such trusts include Nevada, Alaska, and South Dakota. 

In Washington, we have limited options for a person to set up their own trust—a so-called self-settled trust—and to claim asset protection for the assets owned by the trust.  As such, some planners turn to the DAPT friendly states, and establish the trust under the laws of that state. 

The problem with this arrangement is that a Washington court may apply its own laws to any controversy before the court and therefore would potentially allow a creditor to breach the protections offered by the other state.

Still, trusts can be used in other ways to provide effective creditor protection.

Separate from the self-settled trust, a third-party trust can provide creditor protection. As the name implies, the third party trust is set up for another person. 

By way of example, a father could set up a trust for a child, so the trust wouldn't be set up for the father himself, but for the benefit of a third-party child. Because the trust is set up and funded by a third party, the child benefits from creditor protections available to a trust. 

In a sense, the child doesn't own the trust. Instead, the child is simply a beneficiary of the trust. And because the child doesn't own the trust, it generally cannot be used to satisfy the child's creditors. Further, if the assets put into the trust by the father constitute bona fide gifts as discussed above, the assets in the trust are also unavailable to the father's creditors.

Though there is no magic method to protect your assets, by utilizing a mix of the strategies discussed above, an individual can better manage his or her exposure to creditors.

Beau Ruff is an attorney and director of planning at Cornerstone Wealth Strategies Inc., in Kennewick, Washington.