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Asset Protection in Texas

Protecting your assets from creditors and lawsuits is very important. If you are a resident of Texas, however, consider yourself fortunate, for the state's laws regarding asset protection are among the most favorable in the nation.

Assets are considered exempt or non-exempt, with exempt assets being off-limits to creditors. Exempt assets include retirement accounts, life insurance policies, annuities, 529 plan college savings accounts, personal property up to a certain value, and your homestead.

Homestead Exemption

Many states allow you to exempt the value of your primary residence up to a certain dollar amount. Texas, however, allows you to protect your homestead by total acreage, the value of the property notwithstanding.

If your primary residence is considered urban, as many of 10 acres, plus improvements on that land, will be considered exempt from the reach of general creditors. Such property must be contiguous.

If your primary residence is considered rural, the homestead designation will shield such property for a family up to 200 acres, plus improvements, and up to 100 acres, plus improvements, for a single adult. In the case of a rural homestead, tracts of land so designated do not need to be contiguous.

It is important to note that the homestead exemption does not protect your real property against claims by the IRS, homeowners' associations, government entities to which you owe property tax, and mortgage lenders.

Personal Property Exemption

Texas Property Code ยง 42.001 allows married couples to shield personal property up to a value of $100,000, while unmarried persons may do so up to a value of $50,000. Some things considered personal property include farming vehicles, equipment, and tools used in one's profession, clothing, and specified value amounts of jewelry.

Insurance, Retirement, and College Savings Accounts

In Texas, the cash value and proceeds of life insurance and annuities you hold is protected from creditors. 529 college savings plans, in which you put aside funds for college of children and grandchildren, are also protected. Retirement accounts are also generally exempt and protected.

Note: The Internal Revenue Service Holds Super-Creditor Status

The IRS has super-creditor status and most exemptions under state law do not apply if you owe taxes to this powerful federal agency.

Protection of Non-Exempt Assets

One of the primary methods of asset protection is through insurance.

As noted above, in Texas life insurance is protected by state law. Adequate levels of life insurance are an important element of an asset protection plan. Homeowners insurance will provide protection in case a person is injured while on your property. Adequate auto insurance coverage is, of course, critical, and you should consider holding more than the minimum required by the state. Your auto liability coverage should be enough to cover the value of your assets.

Another form of insurance that should be considered is umbrella insurance. Umbrella is insurance provides a backup in case your other insurance plans do not provide adequate coverage.

Business owners should consider the appropriate form of corporate entity for asset protection.

Some commonly used corporate entities include limited liability companies ("LLCs"), limited liability partnerships ("LLPs"), C Corporations, and S Corporations.

C Corporations and S Corporations are similar entities. They both afford protection to personal assets of shareholders from claims. The primary difference between these corporate entities is taxation.

An LLC or LLP affords protection from personal liability for its members. Limited liability companies and partnerships are relatively simple to set up and do not require much of the paperwork of other corporate entities. If a claim is made against an LLC or LLP of which you are a member, only the assets held by the LLC are exposed to such claim, and other assets you hold are protected. This affords a great advantage over a sole proprietorship, in which a claim against the business exposes the all the business owner's assets.

Summary

There are many tools, including asset protection and wealth preservation trusts, that may be utilized to provide for a customized asset protection strategy. The information here is not exhaustive, and consultation with an experienced attorney is advised. With the advice of an experienced attorney, you can assemble a plan that works best for you.

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