How to Protect Assets from Creditors: Trusts, LLCs & Insurance

To protect assets from creditors, you combine legal tools that already shield certain property automatically with deliberate steps you take well before trouble arises: claim your statutory exemptions, carry enough liability insurance, hold property in the right form of ownership, separate risky activities into business entities, and — for larger estates — move assets into irrevocable trusts. No single tool covers everything, and timing matters as much as the choice of tool.

Property the Law Already Shields

Before setting anything up, know what you keep by default. Federal and state law protect several categories of property automatically, whether a creditor is chasing a judgment or you are filing for bankruptcy.

Home Equity, Vehicles, and Household Goods

The homestead exemption protects equity in your primary residence. Amounts vary sharply by state, from modest caps to unlimited protection under a few state constitutions. If you file federal bankruptcy, the homestead exemption is $31,575 per person as of April 1, 2025.¹

Federal bankruptcy law under 11 U.S.C. § 522 also protects $5,025 of vehicle equity, along with household goods, clothing, appliances, and tools of your trade. A wildcard exemption lets you apply unused homestead amounts to any property, which helps if you rent. In many jurisdictions you can pick between the federal list and your state’s list, choosing whichever keeps more property.¹ State exemption amounts for vehicles and personal property vary widely; check your state’s list before assuming the federal figures apply.

Wages

Federal law caps garnishment at the lesser of 25 percent of weekly disposable earnings or the amount by which those earnings exceed 30 times the federal minimum wage.² At the current $7.25 federal minimum, weekly disposable earnings of $217.50 or less are fully protected. Many states cap garnishment even more tightly.

Retirement Accounts

Employer-sponsored plans covered by ERISA — 401(k)s, 403(b)s, and pensions — carry some of the strongest protection available. The statute bars assigning or transferring plan benefits, which blocks judgment creditors.³ The main exceptions are a qualified domestic relations order in divorce or child support cases, and federal tax debts.⁴

Traditional and Roth IRAs are shielded in bankruptcy up to $1,711,975 as of April 1, 2025, an amount that adjusts every three years.¹ Rollovers from ERISA plans into an IRA keep unlimited protection and do not count toward the cap. Inherited IRAs are the exception you need to know: the Supreme Court held in Clark v. Rameker (2014) that inherited IRA funds are not “retirement funds” for bankruptcy purposes and are generally reachable by creditors.⁵

Life Insurance and Annuities

Many state insurance codes shield the cash surrender value of life insurance and the payments made under an annuity contract. Some states protect the full value; others cap the exempt amount. Death benefits paid to beneficiaries are often protected as well. If a large share of your savings sits inside insurance products, the state code where you live decides how far the shield reaches.

Umbrella Insurance as the First Layer

The cheapest protection is buying coverage that pays a claim before it becomes a judgment. A personal umbrella policy adds liability and defense coverage above the limits of your homeowners and auto insurance, typically in million-dollar increments for a few hundred dollars a year. It addresses the most common exposures — car accidents, injuries on your property, defamation — without any restructuring of what you own. Umbrella coverage also pairs well with everything else here: it absorbs the claim first, so the assets you have exempted, retitled, or moved into a trust never come into play.

Tenancy by the Entirety for Married Couples

If you are married and live in a state that recognizes it, holding property as tenants by the entirety is one of the simplest protections available. This form of ownership treats a married couple as a single legal unit. A creditor with a judgment against only one spouse generally cannot force a sale of or place a lien on property held this way; only creditors of both spouses jointly can reach it.

Roughly half of U.S. states and the District of Columbia allow tenancy by the entirety for real estate, and some extend it to bank accounts, vehicles, and other personal property. Divorce ends the tenancy, and it does not help against a debt both spouses owe. Where available, retitling your home and joint accounts costs almost nothing.

Business Entities for Higher-Risk Activities

LLCs and Corporations

Forming an LLC or corporation puts business assets inside a separate legal entity. Debts the business incurs do not automatically become your personal responsibility, and a business creditor is generally limited to what the entity itself owns.

The protection also runs the other way. When you face a personal lawsuit unrelated to the business, a creditor’s remedy against your LLC interest is usually a charging order — a lien on distributions the LLC would otherwise pay you. The creditor cannot seize your ownership stake, vote on company decisions, or force a sale of company assets. If the manager never authorizes a distribution, the creditor waits. Charging order protection is generally strongest for multi-member LLCs. Single-member LLCs get weaker protection in most states, and some courts have let creditors reach single-member LLC assets directly.

Separating High-Risk Assets

Placing risky assets into separate entities limits how far one lawsuit can travel. A real estate investor might put each rental into its own LLC so a claim at one property cannot reach equity in the others. Some states authorize Series LLCs, which let you create internal “cells” within a single filing, each with its own assets and liabilities.⁶ Not every state recognizes them, and the internal liability walls have not been tested everywhere.

Keeping the Corporate Veil Intact

An entity only protects you if you treat it as genuinely separate. Commingling funds, skipping filings, or running the business as a personal alter ego lets a court “pierce the veil” and hold you personally liable. To keep the separation intact:

Maintain dedicated bank accounts for each entity and never mix personal and business funds.
File annual reports and pay state fees on time.
Document major decisions in written resolutions; corporations should hold and record annual meetings.
Fund the entity adequately for what it does. Severe underfunding invites veil-piercing claims.

Courts look at the pattern, not one lapse. A pattern of ignoring the formalities is what gets a veil pierced.

Irrevocable Trusts

How the Protection Works

Transferring property to an irrevocable trust removes it from your personal estate. Because you no longer own the assets, a personal creditor generally cannot reach them. The transfer has to be real: you cannot reserve the power to dissolve the trust, reclaim the property, or direct the trustee’s decisions. An independent trustee with no personal stake should hold discretion over distributions.

A spendthrift clause adds a second layer by preventing beneficiaries from transferring their interest, voluntarily or involuntarily, to a creditor. Because the beneficiary has no right to demand payment, a creditor has nothing to attach. Courts routinely uphold these clauses when the trustee actually exercises independent judgment.

Domestic Asset Protection Trusts

A Domestic Asset Protection Trust (DAPT) is an irrevocable trust that lets the person who created it also be a potential beneficiary. About 17 states authorize DAPTs. Each state’s statute imposes specific requirements — often a trustee resident in that state and a waiting period before protection fully attaches. Those waiting periods run from 18 months to five years depending on the state. DAPTs have not been widely tested in courts outside the forming state, and some commentators question whether courts in non-DAPT states will honor the shield when the grantor lives elsewhere. Offshore trusts are a more aggressive alternative that place assets under legal systems that do not recognize U.S. court orders, at the cost of higher setup, higher maintenance, and more complex tax reporting.

Tax Trade-Offs to Weigh

Trust protection comes with tax costs. Moving assets into an irrevocable trust is a gift for federal tax purposes. For 2026, the annual gift tax exclusion is $19,000 per recipient, and the lifetime gift and estate tax exemption is $15,000,000.⁷⁸ Transfers above the annual exclusion count against the lifetime exemption and require filing Form 709.

Income kept inside an irrevocable trust hits the top 37 percent federal bracket at just $16,000 for 2026, far faster than individual rates.⁹ Well-designed trusts usually distribute income to beneficiaries, who then pay tax at their own rates.

You also lose the step-up in basis. Property you own at death normally gets a basis equal to fair market value, wiping out capital gains built up during your lifetime.¹⁰ IRS Revenue Ruling 2023-2 confirmed that assets in an irrevocable grantor trust are not eligible for the step-up because they no longer sit in your estate. Beneficiaries may owe capital gains tax on the full appreciation since you first acquired the asset.

Timing: Why Late Planning Fails

Every strategy above can be unwound if you act too late. Under the Uniform Voidable Transactions Act, adopted in most states, a court can reverse a transfer made with intent to hinder or defraud creditors. Even transfers made without bad intent are voidable if you were insolvent when you made them or received less than fair value in return.

Most states impose a look-back period of about four years from the date of transfer. A few states use two years; some extend the period for actual fraud. DAPT transfers run on the statute of limitations of the state where the trust was formed, from 18 months to five years. Courts view transfers made after a claim has arisen — or when litigation is foreseeable — with strong skepticism.

Bankruptcy adds criminal exposure. Knowingly concealing or transferring property to defeat the Bankruptcy Code is a federal crime under 18 U.S.C. § 152, carrying up to five years in prison.¹¹ Prosecutions target intentional deception, but the exposure is real. Document a legitimate purpose for each transfer, and put your structures in place before you need them.

Where None of This Works

Several categories of debt pierce almost every shield discussed above.

Federal tax debts. The IRS can levy property that private creditors cannot touch. The exemption list under 26 U.S.C. § 6334 is far shorter than the bankruptcy list: only $6,250 in household goods and $3,125 in work tools are protected from an IRS levy, and a properly filed federal tax lien survives bankruptcy and attaches to exempt property.¹²¹
Child support and alimony. Domestic support obligations override virtually every protection tool. Even ERISA-protected retirement accounts can be reached through a qualified domestic relations order, and exempt property in bankruptcy remains liable for these debts.⁴¹
Debts from fraud or willful harm. When a court finds a debt arose from fraud, embezzlement, or intentional injury, the bankruptcy discharge and many exemptions fall away.
Secured debts. A mortgage or car loan holder keeps its lien on the specific collateral. Stop paying and the creditor can foreclose or repossess regardless of any exemption amount.

The tools in this article work best against general unsecured creditors: credit card companies, medical providers, and civil lawsuit plaintiffs. Against the IRS or a former spouse, expect a much narrower range of options and plan accordingly.

1
Office of the Law Revision Counsel. 11 USC 522 – Exemptions
2
Office of the Law Revision Counsel. 15 USC 1673 – Restriction on Garnishment
3
Office of the Law Revision Counsel. 29 USC 1056 – Form and Payment of Benefits
4
U.S. Department of Labor. Qualified Domestic Relations Orders Under ERISA
5
Justia U.S. Supreme Court Center. Clark v. Rameker, 573 U.S. 122 (2014)
6
Federal Register. Series LLCs and Cell Companies
7
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
8
Internal Revenue Service. What’s New – Estate and Gift Tax
9
Internal Revenue Service. 2026 Estimated Tax for Estates and Trusts
10
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
11
Office of the Law Revision Counsel. 18 USC 152 – Concealment of Assets; False Oaths and Claims
12
Office of the Law Revision Counsel. 26 USC 6334 – Property Exempt From Levy