BAPCPA revises bankruptcy rules for better and worse
Estate Planner Jan-Feb 2006
Estate planning and asset protection planning go hand in hand. After all, strategies for minimizing transfer taxes are meaningless if you have no assets to transfer. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) – which applies to bankruptcy filings on or after Oct. 17, 2005 – contains a number of provisions that affect asset protection.
Spelling out BAPCPA
Contrary to what some pundits would have you believe, BAPCPA doesn’t spell the end of asset protection planning as you know it – but it does change some of the rules. And even though some of these changes make it harder to protect your assets, others – most notably, new protections for IRAs and other retirement benefits – make it easier.
It’s also important to recognize that BAPCPA is a bankruptcy law. Most people don’t file for bankruptcy, and involuntary bankruptcies for individuals are rare. So in most cases, the act has no effect on traditional asset protection planning. But if bankruptcy is inevitable, it’s worthwhile to learn the new rules.
Homesteads less steadfast
State homestead exemptions, which shield your principal residence against creditors’ claims, are less effective under BAPCPA. For example, with prior bankruptcy law you were required to live in a state for only 180 days to use its homestead exemption. BAPCPA increases the residency requirement to 730 days (two years).
BAPCPA also makes it harder to take advantage of the more generous exemptions available in some states. Most states place a dollar limit on their homestead exemptions, but in some states the limits are quite high and a few states offer an unlimited exemption. Under the new law, you’re generally required to live in a state for 1,215 days (three years plus 120 days) before you can exempt more than $125,000 in homestead equity.
Limitation periods less limiting
BAPCPA expands the bankruptcy court’s power to set aside some fraudulent transfers – that is, transfers by a debtor with the intent to defraud creditors and certain transfers for less than “reasonably equivalent value.” Under prior law, the court could recover property transferred fraudulently within one year prior to the bankruptcy filing.
The new law extends this “look-back” period to two years.
The act also creates a special 10-year look-back period for some transactions, including transfers to self-settled asset protection trusts and conversions of nonexempt assets into homestead equity.
These provisions don’t make nonfraudulent asset protection planning any less effective, but they do expose debtors to potential litigation over transactions that previously would have been considered ancient history.
Should you change your plans?
Despite the changes brought by BAPCPA, most traditional asset protection planning strategies remain effective. Nevertheless, it’s a good idea to review your plan and make any necessary revisions. If you’re thinking about relocating to a more homestead-friendly state, for example, consider making your move sooner rather than later to satisfy BAPCPA’s waiting periods. In general, taking action early is preferable, because the sooner BAPCPA’s 10-year limitation periods expire, the better.
In addition, BAPCPA extends the asset protection benefits – up to a $1 million limit – enjoyed by “qualified” retirement plans, such as 401(k)s, and traditional and Roth IRAs.