Part of estate planning is keeping your estate and assets from being diminished by taxes, but also unforeseen expenses, liabilities, etc. The increased litigiousness of American society has made asset protection more important than ever. Here are a few of the basics.
First, assets from others that are given to you can be shielded from creditors. So, if your parents are giving you money, it should be placed in a trust with someone else as trustee and with discretion to pay or not pay out to you or your family. In most jurisdictions, this will keep your creditors from getting at those assets.
Second, you can try to insulate your own assets from your creditors in the following ways:
- Gifting. Make gifts to your spouse, children, and irrevocable trusts. Note, these gifts must not be too close to a bankruptcy filing and must not have been “fraudulent” transfers at the time.
- Tenancy by the Entirety. Some states have a form of joint ownership known as “tenancy by the entirety.” This is a form of ownership between spouses that precludes a creditor of either spouse from getting at the property. This will not protect the property from a creditor of both spouses, however. Further, if the other spouse dies, the debtor spouse will then own the property and his or her creditors can get at it.
- Home sweet home. Bankruptcy exemptions vary from state to state. Almost all states provide some exemption for your primary residence. Some states, such as Florida and Texas, exempt the entire primary residence. If you live in such a state, you may want to keep a very large residence and pay off the mortgage if you see trouble down the road. Recent changes in bankruptcy law now prevent you from moving to another state or acquiring a new home shortly before bankruptcy in order to get a larger exemption.
- Savings for a secure future. IRAs, 401k plans, and other retirement plans are exempt in bankruptcy, at least up to the amount necessary to fund your retirement. So, saving for retirement can be a great way to shelter assets from potential creditors.
- Put the snake in a box. If your exposure to liability comes from a specific source (the snake), you may be able to insulate yourself from that problem by putting it in a limited liability entity, such as a Limited Liability Company (LLC), Corporation, etc. For example, let’s say you own an apartment building and someone slips and falls, becomes paralyzed and files suit against you for millions of dollars. If the building is owned by you directly, they could get at the apartment building and anything else you own. If you place the apartment building in an LLC, the plaintiff is limited to getting the apartment building.
- Asset Protection Trusts. Some jurisdictions in the United States, including Alaska, Delaware, Missouri, Nevada, Rhode Island, Oklahoma, and Utah allow someone to set up a trust for themselves that a creditor cannot get at. Each state has various rules to follow. Further, there are other countries that allow you to set up such a trust where an American court would have no jurisdiction to compel payment. Note, the new bankruptcy law provides a ten year lookback on transfers into an asset protection trust to determine if they were made fraudulently.
- Insure the risk away. Do not forget about insurance, many of the risks we face can be insured away. Insurance can be a great way of removing the risk and sleeping better at night.
There are many ways to help reduce your risk of losing your assets to a creditor, from the simple (insurance) to the most complex (offshore asset protection trusts). A qualified estate planning attorney can help you plan in order to reduce your exposure to creditors, as well as taxation.
Compliments of the McGee Law Firm, Attorney Brandon McGee
Written By: The American Academy of Estate Planning Attorneys