Maximizing Use of Exemptions in Idaho
Use of exemptions in asset protection planning is one of the safest means to protect assets from the claims of creditors because exemptions are grounded in state and Federal statutes and favored as a means of enabling debtors to gain a fresh start. There are myriad Federal and state exemptions, most of which provide very limited protection; however, some exemptions provide much greater opportunity for asset protection planning.
A bankruptcy trustee can sell all of a debtor's property that is not "exempt" to pay creditors. Under the Federal Bankruptcy Code, debtors of a state can use the Federal Bankruptcy exemptions or state exemptions. Idaho has 'opted out' of the Federal Bankruptcy exemptions and its residents must use the exemptions set forth in the Idaho Statutes.
Typically, the state in which the debtor maintains his or her residence will determine which exemption statutes apply for creditor claims brought outside the bankruptcy context; however, complications may arise where the assets subject to exemption are held or located in a different state and in cases where the debtor moves to a different state within a certain period of time prior to the filing of a bankruptcy proceeding. Because the bankruptcy and debtor/creditor exemptions differ by state, in some cases significantly, debtors have attempted to shield a large portion of their assets by moving to states with more liberal protections. Changes made to the Bankruptcy Code in 2005 (the "Revised Code") have curtailed the effectiveness of such moves by requiring that a debtor have lived in a state two years before he/she can use that state's exemptions. The Revised Code also capped the homestead exemption that can be claimed under state's laws to $125,000 if the debtor moved to a state with a larger homestead exemption within 1215 days prior to the filing for bankruptcy protection. Note that these limitations only applies to bankruptcy actions; however, states may also have requirements a debtor must satisfy to avail themselves of exemptions under state law.
The four most commonly used exemptions for asset protection planning are the exemptions for homestead, life insurance, annuities, and retirement benefits. To ascertain their value requires assessment of the scope of protection actually provided under the applicable statutes.
Homestead exemptions vary primarily in the amount of protection afforded. Some states such as Florida and Texas provide almost unlimited protection for a primary residence while others vary from providing no specific exemption to $550,000 for Nevada. Idaho's homestead statute protects up to $100,000 of the net value of a dwelling house, mobile home, or unimproved land owned with the intention of placing a home or mobile home thereon and residing thereon. Most states, including Idaho, do not protect vacation homes and all states do not protect a homestead from claims by mortgagees and others with security interests on the property. Idaho also does not allow the same premises to be claimed separately by husband and wife (thereby doubling the exemption to $200,000)  in contrast to a recent Florida case which allowed a husband and wife to stack their exemptions.
Life insurance exemptions vary among the states depending on who, what, and how much is protected. A life insurance policy involves three parties: the owner (who purchases the policy and has the right to change the beneficiary), the insured (on whose life coverage is measured) and the beneficiary who receives the proceeds of the policy. Most states exempt proceeds paid to a non-debtor beneficiary, but some states require that the beneficiary be a spouse, child or dependent of the insured and may limit the maximum amount that may be paid either as a fixed amount or as reasonably necessary for their support. States typically offer much less protection to the debtor/owner in respect of his rights to the cash surrender value of the policy by either capping the total amount and/or requiring that the beneficiary be a spouse, child or dependent. Idaho Statutes exempt: (i) up to $5,000 in value of unmatured life insurance (other than credit insurance) in respect of which the debtor or the debtor's dependents are the insured, (ii) life insurance proceeds if the insured is not the beneficiary and (iii) group life insurance benefits.
Exemptions for annuities provide very limited protection to high wealth individuals, but do provide some benefit for small to medium sized estates. The Federal Bankruptcy Code exempts payments from annuities on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor. Similarly, state' exemptions for annuities often cap the amount a debtor can receive over a period of time and limit the amount exempted to that reasonably necessary for support. Idaho provides that a debtor cannot receive as annuity proceeds more than $1,250 per month, but in determining whether a particular annuity is exempt, Idaho courts have applied a mathematical approach by multiplying the exemption cap of $1,250 by the number of months the annuity will remain in effect.
Questions that often arise in relation to the annuity exemption is whether a particular payment stream such as wrongful death claims, or lottery winnings fall within the definition of an annuity. The US Bankruptcy Court in Idaho addressed a similar challenge by comparing a purported annuity (i.e., a stream of payments debtors received under a land sale contract comprised of a promissory note and deed of trust) to a contract that would qualify for issuance and delivery as an annuity under the Idaho Insurance Code. In other cases Idaho courts have held that personal injury annuities (even if the annuity didn't stem from an insurance policy) did satisfy the definition of an annuity for purposes of the exemption.
The best avenue for shielding assets from the claims of creditors is through use of retirement and pension plans because, except in a few circumstances, the amount that may be exempted is unlimited. Under the Federal Bankruptcy Code, ERISA qualified plans including IRAs, Roth IRA's, SEP and SIMPLE plans, Keoghs, profit sharing plans, and defined benefit plans are exempt, though the law limits the amount protected in IRAs and Roth IRAs to $1,095,000. Notwithstanding the apparently broad scope of exemptions under the Bankruptcy Code, a plan may be held to not be exempt for many reasons. Similarly there are many plans that may be similar, or a derivative of those listed in the Bankruptcy Code that one would expect to be, but turn out to not be, covered- for example in relation to inherited IRAs. Currently there is a split amount the Federal Bankruptcy courts on whether inherited IRAs are exempt under 11 USC 522(d). Also several bankruptcy courts have held that inherited IRAs are not exempt under their particular state statutes. The bankruptcy court in Idaho, in contrast, held that IRAs and inherited IRAs are exempt under the Idaho statute stating: "Idaho Code 11-604A is much broader than the statutes in states that have disallowed an exemption, and thus can be distinguished."
It is important to note that exemptions do not protect against claims from all creditors, nor do they always preclude a forced sale of the assets. Certain tax claims, alimony and child support, divorce actions, claims by mortgagees and other parties with a security interest in the property, various liens and other claims may defeat or reduce the availability of exemptions. In addition, questions repeatedly arise as to the timing and size of conversions from non-exempt to exempt assets [see our white paper on 'Fraudulent Conveyance'].
Issues and Opportunities with Estate Planning
It is important to note that maximizing use of exemptions for asset protection planning may conflict with certain estate planning goals such as reducing federal and state estate taxes. An exemption cannot be claimed unless the exempt asset is owned by the debtor. Estate planning, in contrast, often involves transferring the asset outside of an individual's estate so that the asset is not considered part of the estate for estate tax purposes. While transfers to irrevocable trusts (a traditional estate planning tool) may accomplish asset protection if the asset is not owned by the debtor, such transfers may be avoided if the transfer occurs within the look back period applicable under fraudulent conveyance statutes.
Bankruptcy exemptions are available because society encourages savings for retirement, places a high value on home ownership, and wants to enable debtors to gain a fresh start. Exemption planning is frequently not considered until financial difficulties arise. As with other asset protection alternatives, the sooner the planning begins and the better it is integrated into retirement, tax, business, and estate planning, the more reliable the outcome will be and the larger the amount of assets that can be protected.
How Can We Help?
Attorneys at Mathieu, Ranum & Allaire are experienced in melding asset protection and estate planning to accomplish business, retirement, estate, and tax objectives. We work with bankruptcy and retirement planning legal counsel and coordinate with our clients' advisors to provide tailored and sophisticated asset protection solutions.
Exemptions found in the Idaho Statutes as of October 2011 are briefly described in the link accessible below. The description therein is provided solely for informational purposes and should not be relied for decision making purposes as the law in this area is complicated, changes over time, is fact specific, and includes many qualifications not listed.