When you hear “asset protection planning,” you may think of people like Jeff Bezos or Warren Buffett. Many believe that only wealthy families and people in high-risk professions need asset protection planning. In reality, everyone is at risk of being sued. A car accident, foreclosure, medical crisis, or business failure could result in a judgment, endangering your finances.
Some view the idea of asset protection planning skeptically. In reality, the U.S. justice system is an unpredictable creature, and often a defendant may be named because of the perception of a “deep pocket”.
What Exactly Is Asset Protection Planning?
Asset protection planning is a frequently-used form of wealth and estate planning. The goal is to position property that could be vulnerable to seizure by future potential creditors in a way that discourages lawsuits and minimizes loss. Asset protection planning is NOT about avoiding taxes, keeping secrets, hiding assets, or defrauding creditors.
Basic, Everyday Asset Protection Planning Strategies
You may be utilizing basic asset protection strategies without knowing it.
The first line of defense is insurance, including homeowner’s, renter’s, auto, business, malpractice, long-term care, and umbrella policies. Often, increasing liability limits on auto and home policies costs much less than one would think. You should regularly check your insurance policies to determine if the policy limits are in line with your current assets and net worth. If your circumstances change, your insurance coverage should change accordingly.
Another type of basic planning is achieved through investments in 401(k)s or IRAs. Under federal law, 401(k)s and IRAs (excluding inherited IRAs) are protected from creditors in bankruptcy (with certain limitations – see this interesting article). Maximizing contributions to your 401(k) can increase your retirement savings and keep investments outside of the reach of future potential creditors.
Advanced Asset Protection Planning Strategies
If you are a landlord, real estate investor, or business owner, or if you work in a high-risk profession, more sophisticated planning may be beneficial.
Lifetime QTIP Trust
A QTIP lifetime trust is for a less-wealthy spouse’s benefit and takes advantage of the gift tax marital deduction. Lifetime QTIP trusts offer flexibility when spouses have lopsided estates. During the less-wealthy spouse’s lifetime, that spouse will receive all trust income and may be entitled to receive the principal. If the less-wealthy spouse dies first, the assets remaining in the trust will be included in his or her estate, making use of the less-wealthy spouse’s estate tax exemption. The remaining trust funds may continue in an asset-protected, lifetime trust for the surviving spouse’s benefit. They will be excluded from the surviving spouse’s estate when he or she later dies and will ultimately be distributed to the wealthier spouse’s chosen heirs.
Spousal Lifetime Access Trust (SLAT)
A spousal lifetime access trust is for your spouse’s benefit and takes advantage of the annual and lifetime gift tax exclusion and exemption. In the event of a large adverse judgment, the trust funds would not be available to your creditors, and your spouse would still be able to access the to support you and your family. After the first spouse’s death, distributions from a SLAT can be as broad or as limited as you choose.
Domestic Asset Protection Trust (DAPT)
A domestic asset protection lifetime trust is for your benefit, and it primarily provides asset protection. The goals of a DAPT are to allow you to fund the trust with your own property, maintain an interest in the trust as a beneficiary, and protect the trust’s assets from your creditors. The laws governing DAPTs are evolving, and there is limited case law interpreting them. Additionally, under bankruptcy law, trust assets remain exposed to creditors’ claims for ten years. Nonetheless, a DAPT can be a powerful asset protection strategy for the right person.
Asset Protection Strategies for Your Family
Asset protection is not aimed solely at protecting assets for your enjoyment. Depending on your family situation, you may desire to protect assets that will be passed to your beneficiaries at your death.
Irrevocable Life Insurance Trust (ILIT)
An irrevocable life insurance trust holds life insurance proceeds for your intended beneficiaries. An ILIT is a tool for implementing planning based on the generation-skipping tax exemption. In addition to asset protection, an ILIT can remove insurance proceeds from your estate for estate tax purposes and, with proper planning, it can provide liquidity for owners of illiquid assets such as farms, closely held businesses, or real estate.
Standalone Retirement Trust (SRT)
An IRA inherited by a non-spouse beneficiary is not protected from the beneficiary’s bankruptcy creditors. As such, the SRT can be a tool for protecting inherited retirement accounts from those creditors.
In an irrevocable discretionary trust, funds are held and invested by the trustee and are only distributed on a discretionary basis according to your stated wishes. The purpose is to safeguard the trust funds for the benefit of beneficiaries who are (or may become) spendthrifts, married to overreaching spouses, or bad at managing money, or who are in high-risk professions or worried about being sued, rather than allowing those assets to be available to a beneficiary’s creditors. While it can be a standalone trust, this type of trust can also be built into other types of trusts.
Credit Shelter Trust
A credit shelter trust is an alternative to leaving assets outright to a surviving spouse. As the beneficiary of the trust, the surviving spouse can benefit from the assets, but they are not part of his or her estate. They are unavailable to creditors and cannot be commingled with a new spouse’s assets.
An inheritor’s trust is a trust created for the benefit of a child or grandchild. It is structured to allow the beneficiary some control over the assets while protecting assets from the beneficiary’s creditors or spouse in the event of divorce. Typically, the beneficiary has the power to appoint or remove a trustee and to replace the trustee with a different one. The trustee has the authority to make distributions to the beneficiary.
To protect your assets, you must plan ahead. Asset protection planning is not a quick fix for existing legal problems. In fact, if you transfer assets to shield them from existing creditors, it could be considered a fraudulent transfer, resulting in legal penalties. Your plan must be in place before a lawsuit arises. In some situations, a significant period of time must pass before the plan effectively protects your assets. Everyone needs some form of asset protection. Availing yourself of legal tools to protect your assets from future claims is a responsible way to plan for your family’s future. Please call our office at (435) 628-7004 to schedule a consultation. With our expertise, we can create, implement, and maintain an asset protection plan tailored to your family and financial situation.