Posted by: The Life and Legacy Planning Group
Much of estate planning has to do with the way a person’s assets will be distributed upon their death. But that’s only the tip of the iceberg. From incapacity planning to probate avoidance, there is a lot that goes into crafting a comprehensive estate plan. One important factor to consider is asset protection.
One of the most important things to understand about asset protection is that not much good can come from trying to protect your assets reactively when surprised by situations like bankruptcy or divorce. The best way to take full advantage of estate planning in regard to asset protection is to prepare proactively long before these things ever come to pass — and hopefully many of them won’t. First, let’s cover the two main types of asset protection:
Asset protection for yourself
This is the kind that has to be done long in advance of any proceedings that might threaten your assets, such as bankruptcy, divorce, or judgement. As there are many highly-detailed rules and regulations surrounding this type of asset protection, it’s important to lean on your estate planning attorney’s expertise.
Asset protection for your heirs
This type of asset protection involves setting up discretionary lifetime trusts rather than an outright inheritance, staggered distributions, mandatory income trusts, or other less protective forms of inheritance. There are varying grades of protection offered by different strategies. For example, a trust that has an independent distribution trustee who is the only person empowered to make discretionary distributions offers much better protection than a trust that allows for so-called ascertainable standard distributions. Don’t worry about the complexity - we are here to help you best protect your heirs and their inheritance.
This complex area of estate planning is full of potential miscalculation, so it's crucial to obtain qualified advice and not solely rely on common knowledge about what's possible and what isn't. But as a general outline, let’s take a look at three critical junctures when asset protection can help, along with the estate planning strategies we can build together that can set you up for success.
It’s entirely possible that you’ll never need asset protection, but it’s much better to be ready for whatever life throws your way. You’ve worked hard to get where you are in life, and just a little strategic planning will help you hold onto what you have so you can live well and eventually pass your estate’s assets on to future beneficiaries. But experiencing an unexpected illness or even a large-scale economic recession could mean you wind up bankrupt.
Bankruptcy asset protection strategy: Asset protection trusts
Asset protection trusts hold on to more than just liquid cash. You can fund this type of trust with real estate, investments, personal belongings, and more. Due to the nature of trusts, the person controlling those assets will be a trustee of your choosing. Now that the assets within the trust aren’t technically in your possession, they can stay out of creditors’ reach — so long as the trust is irrevocable, properly funded, and operated in accordance with all the asset protection law’s requirements. In fact, asset protections trusts must be formed and funded well in advance of any potential bankruptcy and have numerous initial and ongoing requirements. They are not for everyone, but can be a great fit for the right person.
One of the last things you want to have happen to the nest egg you’ve saved for your children is to have them lose it in a divorce. In order to make sure your beneficiaries get the parts of your estate that you want to pass onto them — regardless of how their marriage develops — is a discretionary trust.
Divorce asset protection strategy: Discretionary trusts
When you create a trust, the property it holds doesn’t officially belong to the beneficiary, making trusts a great way to protect your assets in a divorce. The simple act of setting up a trust for a child creates a non-marital asset that will be difficult for her or her spouse to access. Designing the trust appropriately can enhance its asset protection benefits. Discretionary trusts allow for distributions to the beneficiary but do not mandate distributions. As a result, they can provide access to assets but reduce (or even eliminate) the risk that your child’s inheritance could be seized by a divorcing spouse. A discretionary trust with an independent trustee, as opposed to an outright distribution, is one of the best ways you can provide robust asset protection for your children.
Family LLCs or partnerships are another way to keep your assets safe in divorce proceedings. Although discretionary trusts are advisable for people across a wide spectrum of financial means, family LLCs or partnerships are typically used by higher net individuals for asset protection planning because of their complexity and their cost.
When an upset customer or employee sues a company, the business owner’s personal assets can be threatened by the lawsuit. Even for non-business owners, injury from something as small as a stranger tripping on the sidewalk outside your house can end up draining the wealth for which you worked so hard. Although insurance is often the first line of defense, it is often worth exploring other strategies to comprehensively protect against this risk.
Judgment asset protection strategy: Create a Business Entity
Operating your small business as a limited liability company (commonly referred to as an LLC) can help protect your personal assets from business-related lawsuits. As mentioned above, malpractice and other types of liability insurance can also protect you from damaging suits. Risk management using insurance and business entities is a complex discipline, even for small businesses, so don’t only rely on what you’ve heard online or on “common sense.” You owe it to your family to work with a group of qualified professionals, such as your estate planning attorney, a business planning attorney and an insurance advisor, to develop a comprehensive asset protection strategy for your business. Our firm offers both estate and business planning services.
These are just a few ways we can optimize your estate plan in order to keep your assets protected, but every plan should be tailored to an individual’s exact circumstances. Give us a call today to discuss your estate plan’s asset protection strategies and your business protection strategies, as appropriate.
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