Do you take time to think about the need for asset protection? Probably not! Protecting your hard-earned wealth for the sake of your dependents and other beneficiaries is critical. That is possible through careful planning. If you have money in different types of accounts, insurance, or a business, you are already engaging in some sort of asset protection planning.
The next question here is whether you need a more comprehensive, deliberate, coordinated asset protection plan than what you have at the moment. If that is the case, you need to consider the options that will help you achieve this goal. But before that, here is what you should know about effective asset protection.
Amount of Control
The amount of control over your asset that you give up will dictate the level of protection you can achieve. That implies that putting your assets into a revocable trust that you control and of which you are a beneficiary is impossible. The reason is that a court will not overlook such assets to satisfy a judgment against you.
Asset Protection
Proper asset protection demands the adoption of several strategies and approaches.
Being reasonable about the number of assets you include in your asset protection plan is not an option. The reason is that you cannot protect everything. As such, your asset protection plan should leave you fully solvent outside the assets you choose to protect. You should also be able to pay any claims. That includes the claims you know and those you should be aware of at the time of shifting your assets.
The ideal time to protect your assets is when there are no imminent threats. You risk a fraudulent conveyance charge when you try to move assets into a spouse's name. Such costs also apply when you seek to establish irrevocable trusts after getting into a situation that may result in a lawsuit.
Here are some of the asset protection strategies that can help you keep a creditor away.
Testamentary Asset Protection Trusts – The Ruling From the Grave
The Testamentary Asset Protection Trust refers to an irrevocable trust available after your death, which serves several purposes according to the categories below.
1. Discretionary Trusts
A Discretionary Trust refers to an irrevocable trust that can develop into an Irrevocable Life Insurance Trust (ILIT). Discretionary Trusts are an integral part of a Standalone Retirement Trust. If you want to protect other assets, you can include a Discretionary Trust for each of your beneficiaries in your Revocable Living Trust.
Setting up a Discretionary Trust
Sometimes, legal prosecution can become part of your worries. On the other hand, an heir may be in a high-risk profession, they may be a spendthrift, managing money may prove a challenge for them, or their spouse may be overreaching. If that is the case, you should consider incorporating Discretionary Trusts into all of the testamentary trusts in your estate plan.
Pros
- Flexible and easy distribution of trust income and capital.
- Estate planning for the benefit of members of the "family group" in the event of an unexpected death.
Cons
- Distribution of funds focuses on profits and not losses.
- The complexity of establishing and maintaining a trust structure.
2. Standalone Retirement Trusts
A non-spouse beneficiary who inherits an IRA cannot access protection from a beneficiary's bankruptcy creditors. As such, the Standalone Retirement Trust becomes a critical vehicle for protecting retirement accounts from the creditors of your beneficiaries.
Setting up a Standalone Retirement Trust
If your kids are the primary beneficiaries of your retirement account with an amount of over $200,000, you need to consider the Standalone Retirement Trust option. Opting for a Standalone Retirement Trust protects your retirement account from your children's creditors after your death.
Pros
- Prevents losses as a result of imprudent spending when beneficiaries gain direct access to the funds.
- "Stretches out" the funds over time to maximize the efficiency of distributions.
Cons
- Beneficiaries lose some level of control over the IRA funds in exchange for the guidance of the trustee.
- One must meet the requirements for minimum distributions. Otherwise, they will incur tax penalties.
3. Irrevocable Life Insurance Trusts
An Irrevocable Life Insurance Trust (ILIT) allows you to leverage generation-skipping planning. Through an ILIT, you can also protect insurance proceeds for the benefit of your intended beneficiaries. Additionally, an ILIT can remove life insurance proceeds from your estate for purposes of the estate tax. That will be over and above the aspect of asset protection.
Also, note that proper planning can provide much-needed liquidity for owners of such illiquid assets like real estate, farms, or closely held enterprises in the case of an ILIT.
Pros
- ILITs reduce your estate tax liability.
- Heirs access protection from creditors.
Cons
- You cannot modify an irrevocable trust.
- Creating an ILIT can be expensive.
Lifetime Asset Protection Trusts – The Idea of Having Your Cake and Eating It Too
A Lifetime Asset Protection Trust refers to an irrevocable trust available during your lifetime, which you can use in line with the following categories.
1. Domestic Asset Protection Trusts
The goals of a Domestic Asset Protection Trust (DAPT) include protecting the trust's assets from your creditors, allowing you to fund the trust with your property, and maintain some degree of interest in the trust as a beneficiary.
Setting up a DAPT
First and foremost, note that the laws governing DAPTs are relatively new, and they are still evolving. Part of the reasons is that there are fewer opportunities for courts to evaluate DAPTs. However, understand that bankruptcy laws allow exposure of trust assets to the claims of your creditors for ten years.
As much as that is the case, a DAPT will prove a reliable asset protection strategy for the right individual.
Pros
- A DAPT can help you avoid probate fees when the settler passes.
- You can change the trust terms if you opt for a revocable DAPT.
Cons
- DAPT is not the best option if asset protection is your goal.
2. Medicaid Planning Trusts
The focus of Medicaid Planning Trusts is helping you and your spouse to;
- Avoid estate recovery. Protection from the government's estate recovery ensures that assets in this trust pass to your heirs. In turn, that will address the issue of dealing with Medicaid benefits that you receive during your lifetime.
- Access Medicaid while protecting a source of income for the benefit of the healthy spouse.
Setting up a Medicaid Planning Trust
Federal and state governments jointly fund Medicaid. Every state has unique rules and guidelines relating to Medicaid eligibility and estate recovery. That implies that a Medicaid Planning Trust should be tailor-made to the laws of the state where you reside. Also, such a trust may be subject to a look-back period of three to five years and not the "disqualification period".
If you want to achieve the most from a Medicaid Planning Trust, you need to work on it at the earliest time possible.
Pros
- Keeps money out of a creditor's reach.
- Eliminates interruption of income and the use of assets after your death.
Cons
- In some cases, your estate may be subject to estate recovery upon your death if you are over the age of 55 years.
- An individual loses a degree of control over their assets.
3. Spousal Lifetime Access Trusts
"Family Bank Trusts" or Spousal Lifetime Access Trusts (SLATs) act as asset protection and estate tax reduction strategy. A "Lifetime Bypass Trust" is the other term that refers to a SLAT since its funding includes lifetime gifts that remain with a trustee for your benefit and that of your spouse as well. The decisions you make dictate distributions from a SLAT. The same case applies to a Bypass Trust that becomes available after the death of the first spouse.
Setting up a SLAT
If you reside in a state that collects a state estate tax but does not collect a state gift tax, you will discover that a SLAT is useful. The expectation, in this case, is that the state exemption will remain lower than the federal exemption.
Pros
- A SLAT can function as life insurance trusts.
- The trust can grow tax-free.
Cons
- You cannot change the beneficiary interests once a SLAT is in place.
4. Lifetime QTIP Trusts
If you are wealthier than your spouse, a Lifetime QTIP Trust will offer you the following benefits.
- Ensures that the distribution of assets in the trust is in line with the wishes of the wealthier spouse in case both spouses die.
- It makes use of the less wealthy spouse's federal estate tax exemption.
- Offers a lifetime, asset-protected trust for the benefit of the wealthier spouse in case the less wealthy spouse dies first. Remember that this will be subject to the laws of the state where you reside.
Setting up a Lifetime QTIP Trust
Spouses with lopsided estates will enjoy a great deal of flexibility in the case of Lifetime QTIP Trusts. The reason is that as the less wealthy spouse, you will receive all of the trust income. You may access the principal as well during your lifetime. On the other hand, the remaining assets in the trust become part of your estate as the less wealthy spouse in case you die first.
That way, a Lifetime QTIP Trust will make use of the less wealthy spouse's estate tax exemption. Additionally, you can obtain some of the estate tax savings with "portability," but the asset protection aspects will only be available with a Lifetime QTIP. The remaining trust funds can continue in an asset-protected, lifetime trust for the benefit of the surviving spouse depending on applicable state law.
In that case, such trust funds will not be part of the surviving spouse's estate when they die. The wishes of the wealthier spouse will determine the distribution of the trust funds in such situations.
Pros
- The first spouse to die controls disposition.
- Assets remaining in a Lifetime QTIP Trust upon the death of the surviving spouse are not subject to the claims of creditors.
Cons
- Obtaining funds to make tax-advantageous gifts may be a challenge.
- There may be conflicts between the surviving spouse and the remaining beneficiaries.
Conclusion
Asset protection trusts must be irrevocable to safeguard the trust property. However, asset protection trusts still offer the flexibility you need as well as protection for your property and the assets you gift your loved ones or those they inherit. Asset protection planning can be complicated. That explains the reason why you need the help of a capable attorney to identify the ideal trust-based asset protection strategy.
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