Asset protection planning is an estate planning strategy aimed at protecting assets from future creditor claims. While most people do not plan to be sued, it is best to prepare just in case. This type of planning requires an individual to take action before a potential claim arises, so if you wait until there’s a problem to try to fix it, it’ll likely be too late, or at least much more expensive and complicated to attempt to resolve. The right strategies to use will vary for each person and the particular goals individuals have for their estate plans. While estate planning in general, and asset protection planning specifically, may seem overwhelming, an experienced estate planning attorney can help you get clarity about your specific goals and create an estate plan to protect what is important to you in your life, as well as for your business.
Asset protection planning is an important consideration for every wealth planning strategy. However, it’s particularly important for individuals who are at higher risk of getting sued, such as business owners and professionals. Professionals can accumulate significant assets and, unfortunately, those assets may open them up to exposure to creditor claims. Additionally, individuals with significant cash or equity in property or those who expect to receive large retirement accounts or inheritances should also consider asset protection planning to safeguard those assets. Even those without businesses or professions that are more at risk of lawsuits can benefit from asset protection planning since you can’t protect against ever having a creditor and almost anyone can become the victim of litigation. Asset protection planning can protect against future contract creditors (resulting from consumer or bank debt or partnership liabilities), tort creditors (from accidents or malpractice matters), and divorce.
The best time to consider asset protection planning is now — or at least before a potential claim arises. Once a claim arises it is harder to protect assets since there is the risk that planning after a claim arises may be considered a fraudulent transfer. Provisions such as Fraudulent Conveyance Statutes exist to void any transfers of assets that were done with the intent to delay, hinder, or defraud creditors.
A few of the key staples of asset protection planning include having adequate insurance, titling properties correctly, forming and utilizing business entities, and creating Asset Protection Trusts.
If you have any interest in learning more, do not hesitate to mail intake@gcpc.com, or call 703-556-0411 to have a conversation about how estate planning may benefit your business, your personal life, and also provide an opportunity to create a legacy if that is something that may be important to you.
Insurance
An important part of asset protection planning is ensuring individuals have adequate insurance to protect against different circumstances, including automobile insurance, homeowner’s insurance, life insurance, malpractice insurance, directors and officers insurance, umbrella insurance, and long-term care insurance. Auto insurance provides protections if an individual is involved in an accident, as well as protects against liability for damage to another’s property resulting from an accident. Homeowner’s insurance protects the contents of a home in the event of an accident and provides protections if a third party is injured on your property. Life insurance offers protection by providing for the payment of a death benefit to beneficiaries when the insured dies.
Malpractice insurance is important for professionals (such as lawyers and doctors) to protect against professional liability. Directors and officers insurance provides protections for individuals acting as directors and officers in a business entity and sued for wrongful acts in their capacity as directors and officers. Umbrella insurance is excess insurance above the standard coverage for property, casualty, or liability policies and offers additional protection to fill gaps in other policies. Long term care insurance offers protection against financial cost of long-term care services not covered by other insurance, including nursing home care. This insurance is a supplemental policy to protect individuals from needing to use other assets for medical care. While we do not offer insurance products, our estate planning attorneys can recommend trusted referral partners who can advise you in more detail about insurance.
Property Ownership
Another important aspect of asset protection planning is ensuring assets are titled properly. There are different types of property ownership and each type comes with its pros and cons. One option available to married individuals is to own property jointly, in Tenancy by the Entirety. If assets are held this way, only creditors of both spouses are able to go after an asset owned in Tenancy by the Entirety. This adds a level of asset protection since if only one spouse has a creditor, the asset cannot be reached by the creditor. Some financial assets can also be held in Tenancy by the Entirety, but it’s important to check with your specific financial institution to ensure it’s allowed. A downfall of Tenancy by the Entirety is that it ends with the death of the spouse and then the asset protection gained from the tenancy also ends at that death and any creditors of the surviving spouse can go after the asset.
Another option for titling property is as a Joint Tenancy, which has a right of survivorship. This means that the asset automatically passes to the surviving owner upon the death of one owner. However, creditors of both owners have access to the asset, so this ownership does not offer asset protection. Assets can also be held in Tenancy in Common. This type of ownership does not have a right of survivorship. Instead, each individual owns a percentage of the asset. Tenancy in Common does not offer asset protection, but a creditor can only put a lien on an asset owned in Tenancy in Common — they cannot force a sale of the asset. A potential disadvantage of joint ownership is that, typically, both parties must agree to the disposition of the asset. If the parties cannot agree, they must ask the court to intervene. However, an important first step is to inventory your assets to determine exactly how your assets are currently owned (titled), and then our experienced attorneys can help you determine how estate planning can be used to fill in any potential asset protection issues.
Utilizing Business Entities
Business entities can also be utilized in asset protection planning. Different legal structures offer various protections, and each present with their own respective pros and cons. With a corporation, a shareholder’s liability for debts of the corporation is limited. However, a shareholder may be personally liable for a corporate debt if he personally guarantees the debt. A shareholder’s creditor is able to reach the shareholder’s interest in the corporation.
A Limited Liability Company (“LLC”) offers some asset protection. A member of an LLC is only responsible for debts of the LLC equal to the member’s investment in the LLC. Additionally, a creditor of a member is only able to reach the member’s interest in the LLC — the creditor cannot reach the underlying assets owned by the LLC. LLCs are fairly easy to set up and administer, as well as low cost.
A Limited Liability Partnership (“LLP”) is a partnership with one or more general partners, as well as one or more limited partners. A limited partner’s liability is limited to the partner’s investment in the LLP, unless the partner contributes in the control of the business (then the partner may be liable to individuals who transact business with the LLP). However, general partners have the same liabilities as partners in a partnership.
Our experienced business law attorneys work as a team with our estate planning counsel to develop asset protection strategies that anticipate and plan for potential liabilities, lawsuits, and claims so when a claim arises business owners are prepared with an asset protection battle plan.
Asset Protection Trusts
While a Will can be useful in estate planning, they offer little benefit in terms of asset protection. During the probate process, creditors of the deceased can file a claim against the estate for payment of any debts. These creditor debts are paid out of the estate’s probate assets before final distributions are made to beneficiaries. However, Trusts are a key element in asset protection planning. There are many different kinds of Trusts, structured uniquely to achieve specific benefits and have several uses in estate planning, including asset protection planning (you can read more about different types of Trusts here). First, a Trust can be structured to avoid or limit estate and generation-skipping transfer taxes, leaving more assets to flow to beneficiaries. Additionally, Trusts can be established to protect beneficiaries from their own spending, potential ex-spouses, and future creditors. However, Asset Protection Trusts have to satisfy multiple requirements to be valid, so it’s important to work with an experienced estate planning attorney to make sure the Trust is established properly.
Retirement Accounts
Fortunately, many employer-sponsored retirement plans generally offer asset protection. Plans that qualify under the Employee Retirement Income Security Act (“ERISA”) are typically protected from creditors, as well as bankruptcy proceedings and lawsuits. ERISA plans usually include 401(k) plans, pensions, profit-sharing plans, and deferred compensation plans. ERISA plans may also include certain medical plans, such as flexible spending accounts. However, ERISA plans may be at risk in certain situations, including by an ex-spouse if the plan is a marital asset, the IRS, the federal government for criminal fines and penalties, and legal judgments if an individual is involved with wrongdoing against the retirement plan.
Non-ERISA plans are not offered the same asset protection as ERISA plans. Retirement accounts including IRAs, Roth IRAs, and some 403(b) plans may not be protected under ERISA, but some state laws offer similar protections for IRAs. However, inherited IRAs are generally not protected and can be reached by creditors. While we do not offer financial products, our estate planning attorney can recommend trusted referral partners who can advise you in more detail about retirement account planning. We also approach estate planning as a team effort by working with financial advisors, accountants, and your other professional advisors to ensure your estate plan is a thorough, coordinated effort to accomplish your estate planning goals.
College Savings Plans
529 Savings Plans are plans that offer tax advantages, since they are exempt from federal taxes. To be withdrawn tax-free, funds in these plans must be used for qualified education expenses. Funds in these plans are held on behalf of the beneficiary, not the individual that is funding the plan, so funds are not considered part of the funding individual’s estate. Many states protect these accounts from being reached by creditors of both the account owner and the beneficiary. While we do not offer financial products, our estate planning attorney can recommend trusted referral partners who can advise you in more detail about college savings plans or meet with your current college savings plan advisor to ensure your educational savings goals are coordinated with your estate plan.
Foreign Trusts
Trusts may also be established offshore, under the laws of another country. These Trusts may offer greater asset protection and make it more difficult for creditors to reach assets in the Trust due to the location, cost, and additional hurdles involved with pursuing a legal action in another country. These trusts do have their downfalls, including the cost and complexity to maintain, risk of uncertainty about laws in a foreign country, giving up control of the Trust to a foreign Trustee, and the risk that the U.S. will find that the transfer of assets to the foreign Trust was fraudulent (which may result in the assets being returned to the U.S.).
Consider Lifetime Gifting
An important consideration of an overall estate plan is lifetime giving. Efficient giving during life can protect assets by moving them out of your estate before a creditor claim arises, as well as reducing your estate tax burden. Under current tax laws, an individual is permitted to gift $15,000 per year ($30,000 for married couples) to an individual without any tax consequences on the gifter. There is no limit on the amount of people an individual can gift to in a year. While the specific dollar amount may change in later years, the strategy stays the same – a gifter can gift an individual up to the annual exclusion amount ($15,000 in 2021) without generating a gift tax. Gifts above this exclusion amount are taxable.
Lifetime gifting can be a great way for an individual to share their wealth with loved ones, while also minimizing tax burdens. Charitable gifting is also often a part of a comprehensive estate plan. Gifts to charitable organizations are typically not subject to tax and work to reduce the size of the estate and the tax burden. An added bonus of charitable gifts during life is that they typically entitle the gifter to an income tax deduction, further reducing the gifter’s tax burden.
Contact Us
An experienced estate planning attorney can help you prepare and guide you through the process of protecting your wealth and possessions and also provide strategies to leverage your chosen legacy and your values during your lifetime. Estate planning attorneys at General Counsel, P.C. can guarantee that you’ll feel more confident about your future after you’ve made your estate plan or updated your existing plan. We would welcome the opportunity to help you navigate the estate planning process. Contact us today at 703-556-0411, email intake@gcpc.com, or if you’re ready to commit to protecting yourself and your loved ones, simply contact us to schedule an appointment, to have a conversation about how we can help!
