Remember this is only relevant if you are a resident of South Carolina.

EXEMPTIONS in South Carolina – The South Carolina Exemption statutes list specific dollar amounts for certain assets that are protected against all creditors under South Carolina law and under federal Bankruptcy law. The IRS has its own rules that trump so do not plan for these exemptions to protect against IRS tax liens. Pay your taxes, reduce them, but pay them.

1) In South Carolina - Your Home - $50,000.00 Homestead – This is your legal residence located in South Carolina. Each owner of the residence is allowed to protect the first $50,000 in equity in the property. Any single residence can be protected up to a maximum of $100,000 so if married and spouses are co-owners, a couple has the first $100,000 of equity in their residence fully protected. The aggregate for any residence is $100,000 so adding your kids as owners along with your spouse will not increase the exemption.

2) In South Carolina - Motor Vehicle - $5,000.00 – Your interest in only one motor vehicle is protected up to $5,000.00.

3) In South Carolina - Household Furnishings, Clothes, Books, animals, crops, and musical instruments - $4,000.00 – The total combined value of all the above assets are protected to $4,000.00 - Jewelry - $1,000.00 - Jewelry you own up to $1,000 in value is protected - Professional Books and Tools of the Trade –Work related books and tools are protected up to $1,500.00.

4) In South Carolina - 401(k) Plans – Fully Protected - As an ERISA (Employment Retirement Income Security Act of 1975) “qualified” plan, 401(k)s are fully protected against creditors of the account holder - consider this before you roll your 401(k) into an IRA. A 401(k) is a salary reduction plan, where employees must choose a percentage of their salary to contribute to the plan, and the plan spells out the extent of employer matching, if any (regardless of profits). Self-employed individuals can set up a 401(k) plan. However, it’s important to have at least one 3rd party employee in the 401(k) plan group, husband and wife is not safe enough.

5) In South Carolina - IRAs – Limited Protection - IRAs get protection but only to the extent reasonably necessary to support the debtor and any dependents of the debtor – Bankruptcy court will apply an actuarial test and median income test to determine protected amounts. It is not your life style or the life style of the rich and famous from which median income is determined, it’s the average South Carolinian’s life style.

6) In South Carolina - Annuities – Limited - If your money purchased the annuity then only IRS qualified “individual retirement annuities” per IRS code section 408(b) are protected and then only to the extent reasonably necessary to support the debtor and any dependents of the debtor. “Variable” annuities do not qualify under section 408(b) and thus are not protected at all. However, if you are the beneficiary of an annuity after someone’s death and you didn’t fund the annuity with your own money before that person died, then the annuity payments to you will be protected.

7) In South Carolina - Disability Insurance – Fully Protected – Proceeds from your disability insurance are fully protected from your creditors.

8) In South Carolina - LIFE INSURANCE – Varies – Death Benefits are Protected BUT the Cash Surrender and Loan Value may not be Protected -

Against Creditors of the Insured (You) - In all cases, the insured has $4,000 of cash value of a life insurance policy fully protected.

Now the interesting part – The actual insurance element of your life policy is broadly protected by South Carolina exemption 15-41-30(A)(8) (“unmatured life insurance contract owned by the debtor …. is exempt”). This means a creditor can not destroy your life insurance policy thus leaving the beneficiary(s) with nothing when you die. A second South Carolina life insurance exemption statute (38-63-40(A)) states the insured (you) has the “cash surrender value” protected if 1) the beneficiary of the policy is your spouse, children, or other dependents and 2) it is “expressed” that the “cash surrender value” is for the “primary benefit” of those beneficiary(s).

Two things about this are important – First, your policy needs to have the right beneficiaries and needs to allow you to reserve the right to change the beneficiary in the future so after creditor challenges have past you could change the beneficiary to yourself and thus gain access to the value of the policy. Remember in South Carolina, a legal judgment expires in 10 years and can not be extended as in many other states.
Second, because of these specific statutory protections you need an insurance agent who talks with your asset protection attorney or the language of your policy may not afford you the protections of this statute.

Now the Problem – “Cash surrender value” versus “loan value” - Cash surrender value is the money you receive upon canceling a policy, loan value is the money you can take out as a loan w/o having the policy canceled. The maximum loan value is roughly 90% of the cash surrender value.

Is all the cash surrender value protected or is it just the 10% left after the creditor gets the loan value? We don’t know!

It is the creditor that would have to argue against the letter of the statute and they don’t like to do that but life insurance is not automatically protected as you may have heard. Tailoring the language of the policy to the statute is thus important and likely key.

9) Important 2 Year Bankruptcy Look Back Period – You must have purchased your life insurance policy at least two (2) years before you file Bankruptcy (a good reason not to delay) or you are forced into Bankruptcy by your creditors or this exemption (38-63-40(A)) protecting “cash surrender value” will not apply.

10) The Asset Protection of “Leverage” applied to Life Insurance – There is no South Carolina case law on what a creditor’s rights might be if an insured (you) changed the life insurance beneficiary to him/herself after the “heat” of collection had past or after settlement. No case law on the issue works in the favor of the insured (you) because it becomes one more thing the creditor’s attorney has to think about, one more thing that potentially weakens the creditor’s case. Every time a creditor’s attorney has to add another potential weakness to his/her case, whether it be another LLC, another Trust, another jurisdiction, an unrelated 3rd party in the chain of title, or as here, a grey area in the law, the more leverage you and your attorney gain for favorable settlement and in the worst case scenario, for a better chance to prevail in court. The more grey areas and the more hurdles the greater the “leverage”. The key is not miss the opportunity the have as many grey areas and hurdles as are reasonable possible for your circumstance.

11) If You Are Single - Some thoughts on changing beneficiaries and the two (2) year Bankruptcy look back period. If you do not yet have a spouse, kids, or dependents, the requisite beneficiaries for this exemption, you can still purchase the life policy now and start the two (2) year Bankruptcy look back period running and then when you do have a spouse, kids, etc., in the future substitute them as beneficiaries and you will have protection from the statute and you will have shortened or exhausted the Bankruptcy look back period and thus will have the statute's full protection.

There is no good reason to delay.