ASSET PROTECTION PLANNING: What you can do, no matter your level of wealth!
Written by: Wills, Trusts, & Estate Administration
Asset Protection Planning is only for the wealthy, right? No, it can be just as useful for the young couple with relatively little net worth as it is for the multi-millionaire! Asset protection planning does not have to be overly complicated, or overly expensive, to provide you and your family meaningful protections.
When you think of Asset Protection Planning, what comes to mind? Some fancy and complex trust? Hordes of lawyers and certified public accountants? The phrase “offshore trust” or “foreign accounts”? Granted, extremely complex asset protection planning for the hundred-millionaire may in fact include all of that. HOWEVER, asset protection planning is much broader, can be much more simple, and is much more applicable to even the average person than you might suspect. Asset protection planning is really just a component of estate planning.
Lets first get a quick picture of what we are trying to protect assets from. (I know, don’t end a sentence with a preposition, but its needed for emphasis!) Asset protection planning focuses on providing financial security and protection from creditors generally. But that is a far broader statement even than it sounds. It might include protection from a plaintiff from a car wreck, a judgment from a lawsuit whether personal or business, the government (e.g. Medicaid), a divorce, etc., and it might provide protection for yourself, your spouse, your child or any other person you would seek to benefit under your estate plan. In other words, you can seek to protect assets for yourself, or for your loved ones whom you seek to benefit. You might be seeking to protect from outside financial threats (creditors, judgments, etc.) against you or your family, or seeking to protect a child or spouse from his or her financial recklessness, substance abuse, or other issues.
So now let’s look at a number of ways we accomplish asset protection…
I. PROTECTING ASSETS THROUGH INSURANCE
It may seem obvious, but asset protection planning starts with insurance, and in some ways you might not have thought about.
1. Auto insurance. I know, you already have auto insurance. But what are your policy limits? Are they the state minimum? If you are involved in a car wreck where you are at fault, and have liability limits of only $100,000, and are successfully sued for $200,000, where does the other $100,000 come from? You guessed it: your pocket. Step one of any asset protection plan is to consider increasing your liability limits on your automobile policies.
Practical question: why is this important if you don’t have a significant net worth? Because if a plaintiff obtains a judgement against you, in excess of the insurance coverage, the plaintiff judgment creditor can continue to try to collect from you for YEARS after the lawsuit is over! Garnish your wages, hassle and hound you, maybe even seize property from you.
2. Umbrella Policy. An umbrella policy does a couple of things. It provides additional coverage for automobile related lawsuits, but also provides coverage for countless other potential liabilities. You will likely find that the annual premium on an umbrella policy is surprisingly inexpensive. I generally recommend between $1 million and $2 million in umbrella coverage, and I suggest it to all my estate planning clients, even where “asset protection planning” isn’t top on their agenda.
3. Long Term Care (LTC) Policy. It is statistically documented that 1/3 – 1/2 of all people will spend some amount of time in a nursing home or assisted living facility, and the likelihood increases with age. Studies have also found that the average nursing home stay is 2.4 years, citing data from the CDC in Atlanta, Georgia. The national average for nursing home care for a private room is over $8,000 per month, or right at $100,000 per year. A long-term care policy, when purchased in consideration of other available income such as social security or a pension, can go a very long way in ensuring your nursing home care costs can be covered without being forced by law to spend down all of your hard earned assets. Alternatively, it can help ensure you are able to stay in your home with home health care while still preserving assets for your loved ones.
Practical question: How is a LTC policy related to “Medicaid planning”? In short, it can be an important part. The problem with Medicaid planning is that most people wait too long to start the planning due to Medicaid’s “five year look back”. One of the benefits of a LTC policy is that it can buy you some time for some more meaningful Medicaid planning. For some great additional information on Medicaid planning, see my blog article here: https://www.hallboothsmith.com/blog/life-death-and-taxes-estate-planning/estate-planning-medicaid-planning-two-different-things-one/
II. PROTECTING ASSETS THROUGH YOUR ESTATE PLAN
1. Retitling of assets between spouses. You thought step 1 would be a Will didn’t you? Actually, the first step in asset protection planning for spouses is an analysis of how assets are titled (Husband only? Wife only? Jointly? Survivorship?), as well as an analysis of which spouse might face more risk as to potential liabilities.
We see this especially where one spouse is a professional (doctor, lawyer, etc.) who might be subject to potential malpractice suits, or where one spouse owns a business that might have a higher than normal risk of liability from lawsuits or other potential creditors.
The biggest concern I hear from clients about this proposal? “But what if I transfer all my/our assets to my Husband and then we get divorced?” Unless you have a prenuptial agreement, or unless these were and remain assets you acquired prior to marriage and that you have kept separate (and sometimes even then), your assets will be “marital assets” and subject to equitable division by a court in the event of divorce, regardless of in which spouse’s name the assets are titled. So don’t sweat this one!
2. Having a professionally prepared Will. Really, this is more about asset protection for the survivor, as the Will alone won’t provide any protection while you are alive, as it doesn’t actually do or create or convey anything until your death. However, upon your death, your Will might create a marital deduction trust (also known as a QTIP trust) or a credit shelter trust (a/k/a Bypass Trust) to benefit spouse and/or children, and to protect from creditors, to protect from financial recklessness, to protect against the remarriage of the spouse, and other concerns.
Example: a common estate plan for a married couple where the wife is a physician, and after making sure we are comfortable with auto and umbrella policy limits, is often to title many of the assets in the Husband’s name, even if those assets have been largely generated by the wife through her higher income. Further, the Husband’s Will would provide that should he die first, the assets go in trust for the physician wife. In this fashion, the assets are there to provide for her support, but by virtue of the trust, they are unreachable by any creditor, including providing protection from an excess medical malpractice judgement against her down the road!
Planning note: An important of your estate plan to know for certain how you have your beneficiary designations set up on life insurance, retirement plans and IRAs, and even investment accounts. And it is often not what you might expect it should be. Careless designations, or incorrect assumptions on designations, can completely wreck a well laid estate plan and run counter to the provisions of your Will. For some good information on the importance of beneficiary designations, see my blog article on the issue here: https://www.hallboothsmith.com/blog/life-death-and-taxes-estate-planning/pitfalls-dangers-estate-planning-beneficiary-designations-financial-accounts-life-insurance-retirement-plans/
3. Creating an Irrevocable Life Insurance Trust (ILIT). An ILIT is a way to minimize estate taxes, provide significant creditor protection, provide estate liquidity in large estates, and provide for funds in trust for a spouse and/or children. Importantly, it also provides virtually unmatched creditor protection for your family. Simply put, it is one of the best tools in an estate planner’s arsenal. See my March 2018 blog here: https://www.hallboothsmith.com/blog/life-death-and-taxes-estate-planning/irrevocable-life-insurance-trusts-ilits-what-they-are-and-why-they-are-great/
4. Having a prenuptial agreement. Now, if you’re already married and you plan to go to your spouse now and ask for one (though in that case it’s called a post-nuptial agreement), do so at your own risk! (That is meant to be funny!)
A prenuptial agreement is not just an asset protection planning tool, not just an estate planning tool, and not just a domestic planning tool. It is in fact all three. Unfortunately, there are some who view a prenuptial agreement as a negative thing. What I often hear clients say is “I don’t want to go in to a marriage planning for divorce”. That is understandable. However, prenuptial agreements can actually serve to lay a solid foundation to a marriage, setting forth things such as how income will be handled, and what provisions will be made for the other spouse both in the event of divorce and in the event of death. This can be all the more important where there is a large disparity in the net worth or income of the spouses, where it is a second marriage or marriage later in life, where there are children from a prior relationship, and in many other situations. For more details, you might want to see my blog article regarding prenuptial agreements here: https://www.hallboothsmith.com/blog/life-death-and-taxes-estate-planning/prenuptial-agreements-domestic-planning-tool-estate-planning-tool-asset-protection-tool/
5. Creation of a Charitable Remainder Trust (CRT). Granted, you must have some charitable inclination to consider this as an asset protection tool. However, if you are charitably inclined, it can provide significant tax benefits, as well as creditor protection. It is one of the few methods to create a “self-settled” trust which both provides you the settlor a financial benefit, as well as providing excellent creditor protection. For more on Charitable Remainder Trusts see my January 2018 blog here: https://www.hallboothsmith.com/blog/life-death-and-taxes-estate-planning/cake-eating-basics-planned-giving-charitable-remainder-trusts/
6. Using LLCs and Family Limited Partnerships (FLP) for investment or rental property. The proper use of entities such as LLCs and family partnerships can not only protect your other assets, but provide meaningful tax benefits, as well as accomplish other personal planning goals. A FLP can help you or your family retain the ownership and control over the assets in the FLP, provide generational creditor protection, and provide protection for descendants in the event of a divorce.
III. OTHER ASSET PROTECTION STRATEGIES
1. Protecting assets through retirement planning. The simple fact is, there is not much better protection than that offered by an IRA, unless it is the protection afforded by a qualified employer retirement plan such as a 401k plan, profit sharing plan, pension plan, etc. In addition, retirement plans offer significant tax benefits. (How do you think OJ Simpson continues to live comfortably considering unpaid civil judgments against him in the tens of millions of dollars? His pension!)
2. For professionals especially- their parents’ estate plans. Common advice I give to my professional clients, such as physicians, is that if they are going to receive an inheritance one day, consider discussing with parents whether the parents will draft their own Wills to leave the inheritance to their professional child in trust. This way, it is protected from creditors, and the protection offered by a third party trust is among the best protection that can be had. This may also create some generational estate tax planning benefits for the high net worth professional.
3. Protections for special needs children. If you have a child with special needs, and your Will either leaves assets outright to the child or even in trust if not a specially designed trust, those assets will have to be used for the child’s benefit first prior to the child receiving governmental or public assistance benefits. By using a Special Needs Trust (SNT) you can make sure the child qualifies for public and governmental assistance, and ensure your assets are utilized to supplement and enhance the child’s quality of life. See my March 2017 blog here: https://www.hallboothsmith.com/blog/life-death-and-taxes-estate-planning/estate-planning-parents-special-needs-children/
4. Advanced planning. There are countless other strategies that accomplish traditional estate planning goals, charitable planning goals, tax planning goals and asset protection planning goals, from Qualified Personal Residence Trusts, to Crummey Trusts for children to GST Dynasty Trusts, even to Offshore Asset Protection Trusts, and many many others, all of which are beyond the scope of this summary
In summary, asset protection planning is just a component of developing a thorough estate plan. However, be advised, this must all be implemented before you have a judgment against you; in fact, even before there is a known or threatened liability. Otherwise, any transfers made or asset protection documents executed will be deemed a fraudulent transfer and will be set aside, leaving you with no protection.