Asset Protection in North Carolina - Part 1: The Basics

1. What is at risk for the professional, physician, or business owner?

If you face a lawsuit related to your profession, your business, or your ownership in property, the first question is usually - if they win a judgment, which of my assets are at risk? The lawsuit may be related to a promissory note, mortgage, contract, or negligence, or any other cause of action. State law provides certain protections for creditors under the North Carolina constitution and under certain statutes that are directly related to debtor protections.

2. North Carolina Constitutional Protections.

Something modern Americans have taken for granted, the first protection in the North Carolina constitution is the elimination of the English common law practice of prison for debtors. It states in section 28 of Article I, titled "Imprisonment for debt":

There shall be no imprisonment for debt in this State, except in cases of fraud.

The next set of protections is in Article X of the North Carolina Constitution. It contains 5 sections, 4 of which are effectively superceded by the North Carolina General Statutes. However, Section 5 provides protection for a life insurance policy and its proceeds, provided the policy is payable to your spouse, your children, or both. Generously it states at the end:

"...whether or not the policy reserves to the insured during his or her lifetime any or all rights provided for by the policy and whether or not the policy proceeds are payable to the estate of the insured in the event the beneficiary or beneficiaries predecease the insured."

That is, the insurance policy is still protected even if the insured enjoys benefits from the life insurance policy during his life and even if the policy proceeds eventually end up in his own estate. Although it is clear that this constitutional protection is probably available to term and whole life insurance policies, whether it also includes annuities is unresolved.

3. North Carolina Statutory Protections.

Article 16 of the North Carolina General Statutes cover exemptions from the collection of a judgment against a debtor. Before a judgment creditor is given a writ of execution, the creditor must send the judgment debtor a form to designate their exemptions. Covered by these statutory provisions are the homestead exemption up to $35,000, vehicle exemption up to $3500 in value, exemptions for alimony and child support, retirement benefits exemption, 529 plans for college tuition exemption, compensation for personal injury exemption, professionally prescribed health aids exemption, personal goods, apparel and furniture exemption up to $5000, professional tools and books exemption up to $2000. Rather than describing all of these exemptions in detail, I will address the largest ones.

4. Homestead Exemption.

A debtor may shield up to $35,000 in their personal residence, in a cooperative which owns their residence, or in a burial plot. The debtor may divide this exemption between his burial plot and personal residence as well. This exemption only covers the property in which the debtor lives and not, for example, vacant land or a vacation house. If the debtor was married and held the residence property as tenants by the entirety, and their spouse died leaving them the sole owner, the debtor may shield up to $60,000 in value from creditors.

The practical application of this exemption may not be apparent on its face. If a creditor attempts to collect a judgment and moves to have your personal residence sold, the debtor may collect the first $35,000 of the proceeds of the sale. So if the equity in a personal residence is less than $35,000, a judgment creditor would received nothing. Since many personal residences are held jointly by a husband and wife, or between two unmarried people, only half of the equity in the property is available at all, since the other half belongs to the significant other or spouse. Further complicating matters, husband and wives who own property by the entirities, cannot be forced to sell their personal residence by a judgment creditor.

4. Retirement Benefits.

Retirement benefits are covered but only to the extent that they are covered under Section 408(a), 408(b), 408A, or 408(c) of the Internal Revenue Code. These include Individual Retirement Accounts(IRA), Roth IRA, 401(k), and individual retirement annuities. Those plans not covered include inherited 403(b) plans, IRAs, SEP-IRAs, and SIMPLE-IRAs.

5. The Text of Chapter 1C-1601(a).

I have provided the entire list of statutory exemptions in N.C.G.S. 1C-1601(a):

(1) The debtor's aggregate interest, not to exceed thirty‑five thousand dollars ($35,000) in value, in real property or personal property that the debtor or a dependent of the debtor uses as a residence, in a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence, or in a burial plot for the debtor or a dependent of the debtor; however, an unmarried debtor who is 65 years of age or older is entitled to retain an aggregate interest in the property not to exceed sixty thousand dollars ($60,000) in value so long as the property was previously owned by the debtor as a tenant by the entireties or as a joint tenant with rights of survivorship and the former co‑owner of the property is deceased.

(2) The debtor's aggregate interest in any property, not to exceed five thousand dollars ($5,000) in value of any unused exemption amount to which the debtor is entitled under subdivision (1) of this subsection.

(3) The debtor's interest, not to exceed three thousand five hundred dollars ($3,500) in value, in one motor vehicle.

(4) The debtor's aggregate interest, not to exceed five thousand dollars ($5,000) in value for the debtor plus one thousand dollars ($1,000) for each dependent of the debtor, not to exceed four thousand dollars ($4,000) total for dependents, in household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments, that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor.

(5) The debtor's aggregate interest, not to exceed two thousand dollars ($2,000) in value, in any implements, professional books, or tools of the trade of the debtor or the trade of a dependent of the debtor.

(6) Life insurance as provided in Article X, Section 5 of the Constitution of North Carolina.

(7) Professionally prescribed health aids for the debtor or a dependent of the debtor.

(8) Compensation for personal injury, including compensation from private disability policies or annuities, or compensation for the death of a person upon whom the debtor was dependent for support, but such compensation is not exempt from claims for funeral, legal, medical, dental, hospital, and health care charges related to the accident or injury giving rise to the compensation.

(9) Individual retirement plans as defined in the Internal Revenue Code and any plan treated in the same manner as an individual retirement plan under the Internal Revenue Code, including individual retirement accounts and Roth retirement accounts as described in section 408(a) and section 408A of the Internal Revenue Code, individual retirement annuities as described in section 408(b) of the Internal Revenue Code, and accounts established as part of a trust described in section 408(c) of the Internal Revenue Code.

(10) Funds in a college savings plan qualified under section 529 of the Internal Revenue Code, not to exceed a cumulative limit of twenty‑five thousand dollars ($25,000), but excluding any funds placed in a college savings plan account within the preceding 12 months (except to the extent any of the contributions were made in the ordinary course of the debtor's financial affairs and were consistent with the debtor's past pattern of contributions) and only to the extent that the funds are for a child of the debtor and will actually be used for the child's college or university expenses.

(11) Retirement benefits under the retirement plans of other states and governmental units of other states, to the extent that these benefits are exempt under the laws of the state or governmental unit under which the benefit plan is established.

(12) Alimony, support, separate maintenance, and child support payments or funds that have been received or to which the debtor is entitled, to the extent the payments or funds are reasonably necessary for the support of the debtor or any dependent of the debtor.

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Employment Law Basics - For the Small Business Owner - Part 2

2. ERISA - Employment Retirement Income Security Act.

The Employee Retirement Income Security Act of 1974 (ERISA) (Pub.L. 93-406, 88 Stat. 829, enacted September 2, 1974) is a federal statute that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans. ERISA was enacted to protect the interests of employee benefit plan participants and their beneficiaries by requiring the disclosure to them of financial and other information concerning the plan; by establishing standards of conduct for plan fiduciaries; and by providing for appropriate remedies and access to the federal courts.

Most employers are aware of the common “discrimination” claims brought by employees or former employees like gender, race, disability, and age. However, there is another not so well-known anti-discrimination/retaliation claim under the Employee Retirement Income Security Act (ERISA) that is becoming more and more prevalent.

ERISA §510 states that “It shall be unlawful for any person to discharge, fine, suspend, expel, discipline, or discriminate against a participant or beneficiary for exercising any right to which he is entitled under the provisions of an employee benefit plan . . . or for the purpose of interfering with the attainment of any right to which such participant may become entitled under the plan”. This provision provides protection to employees from adverse action by an employer in order to interfere with the attainment of rights under ERISA or in order to stop a participant from availing himself/herself of rights under ERISA.

Historically, ERISA §510 claims have been most often asserted in relation to retirement/pension plans. However, recent cases have been brought under ERISA §510 in relation to health and welfare plans. Claims for ERISA §510 violations occur most often when an employer has terminated an employee, and the employee claims that the termination was in anticipation of the employee making a claim under a benefit plan or becoming eligible for benefits under a benefits plan.

A recent case, Rodrigues v. The Scotts Co., LLC., involved an employer who had a company policy that prohibited its employees from smoking at any time. One employee was terminated shortly after being hired after he tested positive for nicotine. The employee brought several causes of action against the employer, one of which was a claim of an ERISA §510 violation. The employer moved to dismiss the claim, but the district court denied the motion and allowed the case to proceed, stating that the key inquiry is whether the employment action was taken with the specific intent of interference with the right to a benefit.

In order for an employee to prevail under a claim of an ERISA §510 violation, he/she must prove that the employer’s adverse employment action was taken with the specific intent to interfere with the employee’s rights or benefits under an ERISA plan. This means that the loss of benefits was the motivating factor behind the adverse employment action, not merely a consequence of the action. As with other employment discrimination causes of action, if the employee can make an initial showing of a prima facie case for intentional interference, then the employer must prove that there was a legitimate, non-discriminatory basis for their action. If the employer succeeds, then the employee is then required to offer proof that the employer’s legitimate, non-discriminatory reason is a mere pretext. Because the requirements to maintain an ERISA §510 action mirror many other employment discrimination causes of action, they are often brought in conjunction with other causes of action.

As companies continue to explore ways to decrease their operational expenses, benefit costs may seem to be an easy area in which to realize cost savings. However, employers need to be cautious in the criteria used for making benefit reduction decisions. ERISA § 510 claims seem to go hand-in-hand with employment discrimination claims such as age discrimination. Before making any decisions about reducing benefits costs, employer should consult with benefits counsel to ensure that any actions taken aren’t in violation of ERISA.