The exception oftentimes proves the rule. This can be especially true in a court of law or to any prudent planner protecting their assets. Certainly, this is the lesson to learn from the recent bankruptcy case of In re Thomas, 2012 WL 2792348 (Bkrtcy.D.Idaho, Slip Copy, July 9, 2012).
As Forbes recently reported in an article titled “Thomas: Pre-Bankruptcy Exemption Planning Survives And An IRA Is A Self-Settled Trust Or Similar Device,” any kind of asset transfer or protective measure taken leading up to a bankruptcy claim is suspect. Unlike the final shot in a basketball game, the shot (i.e., transfer) doesn’t count just because it left someone’s hand before the buzzer sounds. However, that is what happened in case of In re Thomas.
In that case, a married couple discovered that the total sum of a life insurance policy wouldn’t fall below the low exemption set by their state ($5,000). As a result, they transferred enough cash value from the policies to reduce the value below the state exemption. Then, the couple transferred the cash withdrawn into separate IRA accounts before filing for bankruptcy.
Not surprisingly, the trustee caught on. Eventually, however, the court took pity on the unemployed couple, one of which had been diagnosed with cancer, and no reprimand was made over the relatively small amount (less than $20,000 in all). Nevertheless, this end result is not guaranteed on future cases with similar facts.
As a rule of thumb, proper asset protection requires engaging competent legal counsel before rearranging your assets. If you fail to do so, then you run the risk of creditors successfully challenging your activities as improper at best and fraudulent at worst.
Reference: Forbes (July 17, 2012) “Thomas: Pre-Bankruptcy Exemption Planning Survives And An IRA Is A Self-Settled Trust Or Similar Device”