When most people think about estate planning, they usually focus on leaving their property to the right people, at the right time, and with proper restrictions. They will also often think about avoiding taxes. One of the most important components to good estate planning, however, is the protection of assets from creditors, allowing those assets to ultimately be passed on to ones heirs.
Below are my top 10 tips for asset protection in estate planning:
- Avoid a fraudulent transfer. The first concern is to never defraud your creditors. This type of planning shouldn't start after you've been served with a lawsuit. It should start years earlier. A fraudulent conveyance is a transfer of your property in a manner intended to defraud creditors, which could lead to criminal penalties and all kinds of other things that can go wrong.
- Have proper insurance. This means property and casualty insurance, liability umbrella policies and proper malpractice insurance. Having the right carriers, the right coverages and the right amounts in place are going to ensure that first line of defense so that if you are sued, the insurance is going to step in to help protect those assets you've worked hard to build.
- Review titling of all assets. In many jurisdictions, there is a way for spouses to own property that is called tenancy by the entirety. This can protect those assets from creditors of just one spouse. So, if I'm married and I'm sued individually while my spouse is not named, if I have property held as tenancy by the entirety, that property can be protected from my creditors. Also, if one spouse has greater liability exposure than the other, often housing assets in the name of the spouse without that liability exposure might protect them. It’s important to look at all of your assets to see how they are owned and if there are other ways to title them that will offer greater protection.
- Use gifting. This includes outright gifts to children or other family members. It could involve gifts to a trust, such as irrevocable trusts or gifts to family LLC’s. It is a way for you to transfer property out of your name and into the names of other family members so that the property can be protected if you are ever sued or have liability exposure.
- Utilize exempt assets. These are assets that through their very nature have protection from creditors. Examples include retirement plans such as an IRAs or 401k. Also, in some jurisdictions, life insurance and annuities have protection. This is a way for you to park your assets in places where, if you are later sued, there is protection from creditors.
- Use of entities. Creating limited liability companies or other corporate forms to house assets can work to help you protect those assets in two ways. First, if a liability exposure comes out of the business activity in that entity, you can trap those liabilities and protect them from spilling over into your other personal assets. In addition, by having assets owned by limited liability companies, you can often protect against creditors getting to the underlying assets inside of those entities.
- Equity stripping. This is where you would utilize borrowing against assets and then the lender place a lien against those assets to reduce their exposure to your creditors. For instance, if I have a business that has a number of accounts receivable, and I borrow against those accounts receivable and the bank or other lender has placed a lien on them, the creditors would have to step behind that lender to try to reach those assets.
- Domestic asset protection trusts. Many states such as Michigan and Ohio allow for creation of a domestic asset protection trust (“DAPT”). With a DAPT you can create a trust to hold assets, still have access to those assets, but can prevent your creditors from being able to reach what’s inside the DAPT. These types of trusts are complex and have to be set up properly, well in advance of any creditor problems.
- Utilize offshore asset protection trusts or LLCs. Using offshore entities provides a higher level of protection compared to domestic trusts, but it also involves a lot more expense and often complexity. While this is something to consider as it could offer greater protection than domestic asset protection, it does take your money offshore where you will need to have a foreign trustee over those assets
- Assemble the right team of advisors to help you put into place your asset protection plan. Having attorneys who understand bankruptcy law, creditor’s rights, and trust law is essential to having a good asset protection plan built into your estate planning.