Frequently Asked Questions
This information is intended to be an overview
of the law in Texas. The answers to these questions are not intended
to be legal advice but are provided in the spirit of education. You
should consult with an attorney for legal advice based on your unique
set of facts and circumstances.
The decision to implement asset protection planning
often depends on one’s risk tolerance.
Today many doctors, accountants, corporate officers,
as well as business and property owners face increased risks from lawsuits
and extraordinarily high judgments awarded by juries. Insurance may
no longer be adequate protection.
Asset protection is not a replacement for insurance.
However, effective asset protection planning can protect some of your
wealth if you experience a large claim or judgment that is not fully
covered by insurance.
The best time to implement effective asset protection
planning is when you are not faced with a claim or being sued. In fact,
if you wait until you have reason to believe a creditor will seek to
attach your assets, there is a great risk a transfer will be invalidated
Our firm counsels its clients to integrate asset protection
into tax and estate planning. There are many legitimate and compelling
reasons to consider some of the available asset protection tools in
your tax and estate planning.
Texas and federal exemptions protect certain assets
from the claims of creditors. These exemptions, that include personal
property up to an aggregate amount of $60,000 ($30,000 for a single
person), certain personal property without regard to value, various
homestead exemptions, life insurance and annuities as well as retirement
benefits are addressed in the outline below. Effective planning will
consider and incorporate these exemptions afforded under Texas and federal
A. Under Texas law, the following items of personal
property are exempt up to an aggregate amount of
$60,000 of total property ($30,000 for a single
- Home furnishings, including family heirlooms
- Provisions for consumption
- Farming or ranching vehicles and implements
- Tools, equipment, books, and
apparatus, including boats and motor vehicles used in a trade
- Wearing apparel
- Jewelry not to exceed 25 percent of the aggregate
- Two firearms
- Athletic and sporting equipment, including bicycles
- A two-wheeled, three-wheeled, or four-wheeled motor
vehicle for each member of a family or single adult who holds a driver’s
license or who does not hold a driver’s license but who relies
on another person to operate the vehicle for the benefit of the non-licensed
- Certain farm animals and livestock
- Household pets
B. In addition to the above property limited to the aggregate value
of $60,000, the following items are also exempt without regard to value:
- Current wages for personal services, except for
the enforcement of court-ordered child support payments (unpaid commissions
for personal services are limited to 25 percent of the aggregate $60,000/$30,000
- Professionally prescribed health aids of a debtor
or a dependent of a debtor
- Alimony, support, or separate maintenance received
or to be received by the debtor for the support of a debtor or a dependent
of the debtor
C. Under the homestead exemption, Texas law protects
three types based on acreage and usage rather than value. The only creditors
who can reach the homestead are mortgage holders and taxing authorities.
- The “urban homestead” exemption protects
up to ten acres of land in an urban area (including improvements)
if a family or a single, adult person uses the land as a homestead,
irrespective of its value.
- The “business homestead” exemption protects
land used by a family or single adult person in a business, which
is located in the same urban area as the urban homestead, and there
can be both an urban homestead and a business homestead if the combined
acreage is not more than ten acres.
- The “rural homestead” exemption protects
up to 200 acres of land (including improvements) if a family uses
the land as a homestead or up to 100 acres of land (including improvements)
if a single, adult person uses the land as a homestead.
D. Life insurance and annuities.
Texas insurance code art. 21.21 exempts all money or benefits
of any kind, including policy proceeds and cash values, to be paid or
rendered to the insured or any beneficiary under any policy of insurance
or annuity contract issued by a licensed insurance company.
E. Retirement benefits.
- Federal exemption. Pension benefits, profit sharing
plans and other tax deferred ERISA qualified plans are all 100 percent
exempt, to the extent the contributions to those plans are tax deductible
under the Internal Revenue Code.
- Texas exemption. Texas also exempts 100 percent
of all regular IRAs (to the extent the contributions were tax-deductible).
Also exempt are Roth IRAs even though the contributions are not tax-deductible.
- ERISA qualified benefit plans. The maximum annual
contribution one can make to a defined-benefit plan is one that would
be projected to yield a benefit equal to the lesser of $160,000 for
2002 and 2003 (this amount may be adjusted for inflation), or 100
percent of the participant’s average compensation for the three
highest consecutive years. For the older client with few employees
and extra funds sitting around as a target, this can be a great place
to park otherwise non-exempt cash.
Estate and business planning has always focused on
the management and preservation of wealth with the idea of passing it
on to the next generation. If, as a result of unfortunate circumstances,
that wealth disappears at the hands of creditors or other claimants,
the plan has failed. A good plan will always anticipate what can go
wrong, and implement protective measures accordingly. The litigiousness
of our current society and the increase in the number of known economic
risks makes assets protection planning an imperative consideration for
the estate and business planner.
As with almost all aspects of planning, the adage of
“plan early and plan often” holds true with respect to asset
protection planning. Even if the estate or business planning client
does not sense exposure to creditor issues, consideration of these issues
is still warranted and may end up saving the integrity of the plan,
if not in the generation of the client, then in subsequent generations.