Protecting assets is often important to people interested in estate planning. They want to protect the value of assets from being reduced from a variety of risks. These risks may include claims of creditors, the fear of law suits, or high fees and taxes associated with the transfer of assets when they are deceased.
Typical fraudulent transfer statutes allow creditors to reach assets if the protection method was used with the intent to hinder, delay, or defraud creditors. Asset protection as we are discussing it here does NOT include unethical and often illegal scams used with the intent of defrauding legitimate creditors. Rather, asset protection is a planning activity focused on keeping your estate safe for your own enjoyment, and for the enjoyment of your heirs.
Exotic methods sometimes pushed by seminars and aggressive marketing, may be very complex and expensive and yet may still be susceptible to attack by creditors. Family limited partnerships (FLPs) seem to have captured the public eye, yet they may be in this category, unless there is in fact a family business to be managed under the required formalities. Also included in this category may be creation of domestic asset protection trusts under the laws of such states as Alaska, Delaware, or Nevada, particularly by non-residents of these states. It is possible that they may work well in some cases, however there are also sound legal arguments of why they may not withstand the collection efforts of creditors. Offshore asset protection trusts created and held in foreign jurisdictions (such as in the Bahamas, Cook Islands, Cayman Islands, etc.) bring additional concerns, and probably should not even be considered by most estates.
People may appropriately fear that their estate could be jeopardized through health or accidental causes which are no fault of their own. They may want protection from potential future creditors and from the possibility of unreasonable law suits. In such cases, it may be appropriate to use the least restrictive and least expensive methods that will meet your actual needs. Below is a list of some possibilities, generally listed in order of easiest and least expensive, to complex and more expensive:
Critically review the likelihood of suit. Other protections for your assets may be sufficient without the use of more complicated methods. For example, a manager working within a corporation may fear that their position of responsibility puts them at risk of suit from a customer, or from someone involved in a personal injury. What is the actual likelihood of such a suit? Are the protections from working within a corporate structure already sufficient protection?
Review of assets which may already be exempt or protected. The federal government and each state identify certain assets that are exempt from judgments and unreachable by creditors. If an estate is largely made up of such exempt assets, adequate protection may already be in place.
Use of basic estate planning tools (e.g., revocable trusts, durable powers of attorney, advance health care directives) to avoid probate fees and avoid the possible need for conservatorship.
Use of a credit shelter/bypass trust after the first spouse's death to delay, reduce, or eliminate estate taxes. Income from assets held in such a trust can be available to the surviving spouse during their lifetime.
Review of protection available through various forms of insurance. Long-term care insurance is a good example. As people continue to live longer and as the cost of health care continues to increase, the possibility of the need for care may be one of the most significant risks to one's estate. Other examples include adequate use of life and liability insurance, along with possible umbrella insurance policies. A knowledgeable and trustworthy insurance agent can be very helpful in providing information on these products, and such insurance may be very effective in providing valuable protections.
Develop and implement a gifting plan that takes advantage of the annual gift tax exclusion to transfer wealth to the next generation while you are still alive.
Use of an irrevocable life insurance trust in situations where life insurance proceeds are significant. This method may be very valuable in planning to minimize the impact of estate taxes if these are an issue for the estate.
In a fairly large estate, and where charitable giving is also a goal of the estate plan, there is the possible use of a charitable remainder trust. This is an irrevocable trust in which the person creating the trust (the trustor) can reduce the size of their estate as a way to reduce estate taxes, and at the same time provide a gift to the charity. The income from the assets in trust can be provided to one or more persons during their lifetime. There may also be income tax benefits for the trustor in the year the asset is transferred to the trust.
In some cases, a married couple may consider transferring ownership of assets to the spouse less likely to be sued. This involves the formal transfer of property between spouses, called a transmutation. Such a transmutation must be in writing and must be signed by the spouse adversely affected by the agreement. While community property may be reachable by creditors of either spouse, the "separate property" of one spouse may be protected from "separate debts" by creditors of the other spouse. Warning! This means of protection can be very complex and should NOT be pursued without the assistance of an attorney! Disadvantages oftransmutation must be carefully weighed against potential advantages.
Use of straight-forward irrevocable trusts. Since these trusts are irrevocable, the assets within the trusts may be thought of as given away and no longer owned by the person creating the trust. California statutes do not provide particularly strong asset protections when compared to some other states, but the protections of irrevocable trusts created under California laws may often be adequate for most, estates. However, the use of irrevocable trusts may only be appropriate when the true risks to the assets justify the complexities, costs, and potential difficulties associated with these trusts. Irrevocable trusts may be very difficult or impossible to undue later, and your view of such trusts may be much less favorable 10 or 20 years from now.
In situations where a key asset is a business, possible use of an appropriate form of incorporation. For example, use of a limited liability partnership (LLP) or limited liability company (LLC) would be included in this form of protection. Another example may be use of a family limited partnership (FLP) in operating a family related business. This method may have tax benefits in transferring the business to the next generation, however FLPs are very complex and there are many cases where the IRS has been successful in denying the intended benefits where the facts of the case indicate that reasons for the business formations was essentially an attempted tax evasion. Warning! Incorporation is complex area and should only be pursued with the assistance of an attorney!
In situations where a personal residence is a key asset of a fairly large estate where estate tax is a concern, possible use of a qualified personal residence trust (QPRT). This technique may provide creditor protection and allows for the transfer of a personal residence to the next generation at reduced transfer tax cost, while retaining the right to live in the residence for a specified period of time. If the person creating the QPRT survives the term, they can then rent the residence from the beneficiaries, which in effect is another transfer of wealth to the next generation while still alive. However, if the person dies during the term, the value of the residence will be included in the estate, defeating the reduction in transfer tax. Warning! Creation of a QPRT should only be pursued with the assistance of an attorney!
