Many people believe that asset protection planning is only for wealthy people or professionals susceptible to malpractice claims, such as doctors or lawyers. That is not the case. In today’s litigious society, anyone can be sued.
The United States justice system is unpredictable. In view of expanding theories of liability and the possibility of being perceived as having deep pockets, everyone should properly protect themselves, their loved ones, and their money and property.
Asset protection is not about avoiding taxes, keeping secrets, hiding money and property, or defrauding creditors. You cannot do this type of planning once you are aware of a potential lawsuit or creditor; this type of planning must be proactive. Asset protection planning aims to provide an incentive for settling a claim, improve your bargaining position, offer options when a claim is asserted, and, ultimately, deter litigation.
Take Advantage of Basic Asset Protection Strategies
You should already be taking advantage of the first line of defense: insurance. You likely already have homeowner’s or renter’s insurance and automobile insurance. Depending on your circumstances, you should also consider business, personal property, malpractice, long-term care, and umbrella policies. Review your policies regularly to determine whether the amount of coverage is in line with the value of what you are insuring. You should also review your policies during each renewal period to confirm that the coverage is still adequate and the benefits have not changed since your last review.
If you are still working, you should also maximize contributions to your 401(k), since federal law protects these accounts in bankruptcy. Money held in an individual retirement account (IRA) is also protected under federal bankruptcy law (subject to certain limits). Further, depending on state law, if you are married, you and your spouse may own real estate and personal property as tenants by the entirety, which may be exempt from creditors’ claims if only one spouse is the debtor. Finally, annuities and the cash value of life insurance may also be protected under applicable state law.
Digging Deeper into Advanced Asset Protection Strategies
Every strategy has its downsides, so avoid relying solely on these basic approaches. The risks posed by lapsed policies and the limitations on state exemptions in bankruptcy necessitate further planning to protect your money and property fully. In particular, if you are a landlord or real estate investor, own a business, work in a high-risk profession, or have accumulated or inherited a significant amount of unprotected property, consider more advanced asset protection planning. This typically involves transferring some or all of your ownership interest in the protected property to another entity, such as a special type of trust, to make it more difficult for a creditor to stake a claim.
Advanced planning is complicated and may require several layers of protected entities, such as limited liability companies (LLCs) and one or more irrevocable trusts. LLCs and irrevocable trusts, when correctly implemented, offer significant protection, depending on the amount of your wealth and exposure to liability.
Irrevocable trusts can be used for your benefit (self-settled trusts, such as a domestic asset protection trust (DAPT)) or your family’s benefit (third-party, such as a spousal lifetime access trust (SLAT)). If you transfer your money and property into a properly formed and administered self-settled trust, you may be able to retain a beneficial interest while denying your creditors access to the accounts and property. However, you may have to give up control of the accounts, property, and trust.
US law on self-settled asset protection trusts (in each state that recognizes them) can differ as to exception creditors (creditors who can still gain access to money and property in a protected trust, such as an ex-spouse who is owed alimony or a child who is owed child support) and statutes of limitations applicable to preexisting and future creditors. Because state law governing asset protection is continuously evolving and varies by state, work with an experienced attorney to ensure that the appropriate steps are being taken.
A third-party trust is a great way to provide inheritance protection for your loved ones. In this day and age characterized by high divorce rates, lawsuits, and bankruptcies, leaving an inheritance outright is risky. For example, it could end up in the hands of your child’s spouse instead of benefiting your children or grandchildren.
Final Considerations
In our litigious society, asset protection planning is essential for people of any means. Done correctly, it is completely legal. We are available to review what you own and advise you on all of your options for implementing and maintaining a plan that will protect you and your loved ones. Just call 708.448.5169 to schedule a convenient time for you to meet with us.
