Exemption planning is the process of reorganizing one's wealth so that much of it is protected (or 'exempt') by law from creditor attachment, even though it is still owned by that individual. There are some assets that are exempt under federal law, but most exemptions come from state law. Then there are bankruptcy exemptions, which may involve federal and/or state exemptions, and which apply only in bankruptcy. State protected assets vary greatly from state to state as do the extent to which these assets are protected. However, there are general categories of exempt assets set by both the federal government and each state. Other assets are exempt under bankruptcy law. Assets that are commonly exempt include the home equity, wages, pensions and retirement accounts, profit sharing plans, annuities and insurance, tools of the trade, certain household items, burial plots, jewelry and other personal possessions. Since the exemption laws do vary between states, you must check your own state laws to see which assets are specifically exempt in your state.
At first glance, you would think exemption planning is simple. After all, if the law says an asset is exempt, then it's exempt. That's not always so. There are always exceptions, caveats, and conditions to the exemption laws. Knowing when an 'exempt' asset is really exempt from a certain creditor and when it is not is what you would expect the asset protection planners to know.
With our own clients, we mostly discuss exemption planning in a non-bankruptcy context. However, when one files for bankruptcy the exemption rules change considerably. Therefore, with exemption planning one must consider the likelihood of an individual declaring bankruptcy in the future. Even if bankruptcy is unlikely, one must plan for the contingency that it could happen. For example, an individual could be involuntarily petitioned into bankruptcy (Chapters 7 or 11) by three or more creditors if their aggregate claim exceeds $12,300, or even by one creditor if the debtor has fewer than 12 creditors, and the creditor filing the petition has claims exceeding, in the aggregate, $12,300.
The law of the state where one resides determines whether one may use state exemptions only, or whether one may choose between state or federal exemptions when they are in bankruptcy. If a state allows one to choose, then one may choose one set of exemptions – but not both. The federal exemption amount, in bankruptcy, may be doubled for a married couple, although this may or may not be the case with the state exemptions. Note that moving to a more exemption-friendly state before one files bankruptcy only works if the move is made at least 730 days (about 2 years) before filing.