What You Should Know About Asset Protection Exemptions  
1.  What are Asset Protection Exemptions?

The term “Asset Protection Exemptions” refers to the various assets that are protected by Arizona law from most or all creditors after a judgment or bankruptcy filing.  Asset protection and bankruptcy attorneys usually refer to these as statutory exemptions.  They are available to any Arizona resident and operate independently from corporation, LLC, and trust laws.  Each statutory exemption limits the remedies available to a court when attempting to seize assets from a debtor (the person who owes the money to a creditor).

2.  What are drawbacks of relying on Asset Protection Exemptions?

Statutory exemptions fail to provide much peace of mind to someone interested in protecting assets from future creditors.  The exemptions are intended to protect essential assets only as defined by public policy.  Asset protection planning does not rely solely on statutory exemptions.  Some exemptions rely on case law, which is subject to change over time.  Many exemptions are Arizona-specific, so persons moving out of Arizona – or beneficiaries who inherit from Arizona residents – may not have the same protections.   

3.  What are some of the Asset Protection Exemptions?

These are some examples of statutory exemptions in Arizona:

Homestead Exemption – Up to $150,000 of equity in your primary residence is exempt from creditor claims in Arizona.  See A.R.S. 33-1101.  The exemption is automatic. 

Household Goods – Arizona law protects essential household goods up to $6,000 in value.  This includes furniture and furnishings, appliances, and personal items.  See A.R.S. 33-1123.   

Personal Property – Arizona law protects many personal items such as (1) $300 cash, (2) clothing up to $500 in value, (3) musical instruments up to $400 in value, (4) domestic pets, (5) a wedding ring up to $2,000 in value, (6) books up to $250 in value, (7) a bicycle up to $1,000 in value, (8) a firearm up to $1,000 in value, (9) a computer up to $1,000 in value, (10) a car up to $6,000 in value, and (11) a wheelchair.  See A.R.S. 33-1125.  A separate exemption protects up to $5,000 in "tools of the trade," which includes websites and marketing tools.  See A.R.S. 33-1120.  

4.  Is life insurance protected by law?

Yes.  During the policy owner’s lifetime the cash value (investment portion) of a life insurance policy is 100% protected after the policy has been in force for two years.  See A.R.S. 33-1126(A)(6).  This is a valuable benefit of permanent life insurance that term insurance cannot provide.  In order to qualify, the life insurance policy must name a surviving spouse, child, parent, brother or sister, or any other dependent family member as beneficiary.  

After the insured’s death the death benefit is also fully protected from the insured's creditors in Arizona.  See A.R.S. 20-1131(A).  The amount of the exemption is unlimited, provided the beneficiary did not also agree to be responsible for the debt.  However, Arizona law gives the surviving spouse and children up to $20,000 of claim-free insurance proceeds even if they are also obligated to pay the debt.  See A.R.S. 33-1126(A)(1).  In other words, if a person dies insolvent but owned a life insurance policy, then a spouse or child can still inherit up to $20,000 of life insurance proceeds free of any creditor claims. 

Annuity contracts are treated much the same way as life insurance.  The investment component of an annuity is 100% protected after the contract has been in force for two years.  

5.  Are retirement account assets protected by law?

Yes.  Federal law (under “ERISA”) protects the assets in a qualified retirement plan.  This includes all 401(k), 403(b), and TSA accounts.

Arizona law goes further by protecting the assets in an Individual Retirement Arrangement (“IRA”) by statute.  See A.R.S. 33-1126(B).    

Arizona law apparently goes even further by protecting IRA assets from a beneficiary’s creditors after the original owner’s death, provided the account is treated as an inherited IRA.  This result is supported by an important Arizona bankruptcy case (see In re Thiem, Bktcy Ct AZ 1/19/2011, 107 AFTR 2d 2011-529), but later the US Supreme Court overruled a portion of the case in Clark v. Rameker (June 12, 2014).  The Clark case ruled that an inherited IRA is not protected in a bankruptcy case, although the court did not specifically address whether a conflicting state statute might change the result.  Therefore, the Arizona statute continues to protect an Arizona resident's inherited IRA assets from seizure and attachment outside the bankruptcy context (from judgment creditors) and most likely also in bankruptcy (although there is some uncertainty about this latter point).  This makes Arizona one of only 8 states that offers this protection.  The other states are Alaska, Florida, Idaho, Missouri, Ohio, North Carolina, and Texas.   


About the Author
Thomas J. Bouman provides legal counsel in the areas of estate planning, estate settlement, and asset protection.  He brings a highly systematic approach to the practice of law, which is critically important when wading through the complex, and often bizarre, legal requirements associated with estate and trust law.  Mr. Bouman is author of the Arizona Estate Administration Answer Book and a prominent member of Wealth Counsel, LLC, the nation’s premiere organization of estate planning attorneys. 

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Thomas J. Bouman, Attorney
Bouman Law Firm
7650 E. Broadway Blvd. #108
Tucson, AZ 85710
(520) 546-3558
tom@tomboumanlaw.com