Professionals, including doctors and lawyers, executives, entrepreneurs, and high-wealth individuals, are often concerned about the exposure of their assets to claims of creditors. Creditors’ claims arise from numerous events. For example, while driving and talking on your cell phone, you run through a red light, smash into the drivers’ side of another car and severely injure three passengers in that car, all resulting in a large judgment for damages against you. Or your business has defaulted on a large bank loan that you personally guaranteed. Your unprotected assets are now at risk of seizure for payment of the judgment or satisfaction of the guaranty.

In addition to lawyers who practice in the fields of bankruptcy and debtor/creditor relations, estate planners assist their clients with asset protection planning. This planning does not involve hiding assets, making fraudulent, illegal transfers, or representation in bankruptcy. Rather, this type of asset protection planning involves recognized legal techniques that help shield assets from the reach of judgment creditors and are implemented well in advance of the possibility of future creditor problems. Some common mechanisms to be considered by North Carolina residents include:

  1. Tenancy by the Entirety. A married couple owning real property in North Carolina is granted special creditor protection over that real property, whether a primary or secondary residence, unimproved real estate, or commercial or industrial real property. With the exception of federal tax liens, tenancy by the entirety property (not including furnishings or movable equipment) is subject only to the joint creditors of the couple and not the sole creditors of only one spouse. So, for your non-working spouse to solely own all of your real property in North Carolina may be the wrong ownership strategy for future protection from your creditors. In addition, if tenancy by the entirety property is voluntarily converted into cash, then the protection of the tenancy by the entirety property is lost, and 50% of the cash is subject to the sole creditors of each spouse. Bank and brokerage accounts owned jointly by a married couple do not possess the creditor protection of real property owned as tenancy by the entirety.Bank accounts in the joint names of spouses are presumed to be equally owned by the spouses and equally subject to each spouse’s creditors. However, in North Carolina, if the creditor of one spouse can prove that all of the funds come from that spouse, then the creditor can attach the entire bank account. So, a doctor residing in North Carolina who transfers all of his bank accounts into the sole name of his non-working spouse will not be able to shield his bank accounts from his creditors. This same rule is extended to brokerage accounts owned jointly by spouses.
  2. IRAs and Contractual Death Benefits. In North Carolina, the following assets are specifically exempt from the reach of judgment creditors: Regular IRAs, Roth IRAs not exceeding $1,000,000 (not including rollover amounts), individual retirement annuities, pension plans, 401(k) plans, SEPs covered by ERISA, and a retirement vehicle which has received a favorable determination of tax exempt status from the IRS. It is wise to maximize your tax-deferred contributions to these accounts and plans now to protect more of your assets from future creditors. You should also consider how to pass these assets to your heirs at your death. An inherited IRA established for the benefit of someone other than your spouse will not have creditor protection, thereby subjecting the IRA to the beneficiary’s creditors after your death. The use of Trusteed IRAs, however, provides the desired protection from the beneficiary’s creditors. 
  3. Life Insurance. A life insurance policy payable to any beneficiary other than the purchaser of the policy is exempt from creditors, even if the beneficiary designation is revocable. Investment of excess cash in whole, universal, and variable life insurance policies provides excellent asset protection for the internal cash value. 
  4. Limited Liability Companies and Limited Partnerships. Creditors may obtain “charging orders” over limited liability membership interests and limited partnership interests. These orders generally limit the creditor’s rights to the receipt of distributions attributable to the interests as they are made by the entity, thereby shielding the assets owned by the entity from the member’s or partner’s separate creditors. Distributions may be halted by the entity until the order expires, or you may be able to satisfy the judgment through a compromise amount. Interests in such entities owned by spouses and children carry this same protection. You must respect the separate character of interests in the entities such as maintaining separate accounts and not commingling your assets with the entities’ assets. 
  5. Trusts. Although trusts you establish for your own benefit in North Carolina will not protect trust assets from your creditors (other states’ laws may provide trust protection), trusts established by you for the benefit of your spouse and children may be structured to protect the trusts’ assets from the creditors of your spouse and children. Estate planning usually involves the establishment of spendthrift trusts for your heirs to provide protection of their inheritances from their own creditors and divorced spouses. 
  6. Gifts. For gift and estate planning purposes, you should utilize your gift tax annual exclusion ($19,000/donor/done in 2025) to make gifts to your children and grandchildren. You cannot retain control over these gifts because to do so exposes the gifts to your creditors. Transfers of gifts into spendthrift trusts for third parties shield the transferred assets from your creditors provided the assets are not available to satisfy your legal obligations to support your children (e.g., feed, clothe, educate, and house your minor child). Funds in 529 plans, prepaid college tuition plans, and Coverdell educational savings accounts are protected depending on the timing of placement of funds and the amount of the funds in these types of accounts. North Carolina specifically exempts from the parent’s creditors $25,000 in a 529 college savings account established for her/his child. 
  7. Liability Insurance. You should periodically review your liability insurance coverage and upgrade your coverage if necessary. In addition, you should obtain an appropriate level of umbrella coverage. Persons in need of asset protection are often considered “deep pockets” in our litigious society. Liability insurance is only one mechanism for asset protection because it has coverage limitations and policy limits. Other strategies, including all or some of the techniques described above, combined with adequate liability insurance, need to be considered in light of your own tax, financial, and personal circumstances. Of course, no plan should be implemented without advice from competent counsel. 
  8. Pre- and Post-Marital Agreements. Equitable distribution and alimony may be waived in pre- and post-marital agreements.