When you hear someone discussing the need for asset protection you may make the (incorrect) assumption that your assets are already protected in your estate plan. Some of the more common threats to your assets may, indeed, already be addressed. For example, you may have already considered the possibility of divorce causing the loss of assets because of the required division of marital assets. You may have also planned for the possibility of an economic downturn or a failed business venture as well as for the impact that federal and/or state gift and estate taxes could have on your estate assets. Although your existing plan may account for these common threats, there are other ways in which your assets may be at risk that you have not considered.
The threats you haven’t yet considered are the ones that have the potential to do the most harm. For example, while your own divorce poses a threat to your assets, so does the divorce of a beneficiary. If your daughter and son-in-law decide to end their marriage, the assets gifted to your daughter could end up in your son-in-law’s possession as part of the divorce if you aren’t careful. Another threat people often overlook is the cost of long-term care (LTC). Unless you can afford to pay for LTC out of pocket, you may be forced to turn to Medicaid for help. The Medicaid “spend-down” rules could result in the loss of a significant portion of your assets if you need LTC down the road.
If you have worked hard and invested wisely throughout your working years, you undoubtedly want the assets you have amassed to be available to help provide a comfortable retirement. You probably also want to pass down assets to children and other loved ones. To achieve either, or both, of those goals though, you must protect the assets you have. Asset protection planning refers to the tools and tactics incorporated into an estate plan to prevent the various threats to your assets from causing you to lose some, or even all, of your assets.
Trust are a common asset protection planning tool; however, you must use the right type of trust and the trust agreement must be properly drafted for a trust to work as an asset protection tool. Trusts are broadly divided into testamentary and living trusts. Testamentary trusts do not activate until the death of the Settlor whereas a living trust activates when all elements of formation are complete. Living trust can be further sub-divided into revocable and irrevocable living trust. A revocable trust can be modified or revoked by the Settlor without the need to provide a reason whereas an irrevocable living trust cannot be modified or revoked by the Settlor. Because both a testamentary and a revocable living trust can be modified or terminated by the Settlor, the assets held in those trust are not protected from creditors and other threats. Assets transferred into an irrevocable living trust, however, become property of the trust, out of reach of the Settlor, and are protected.
The simple answer is “yes.” People often hold title to property jointly with a spouse or adult child under the belief that because the property is jointly owned it is safe from creditor claims or other threats. That is not always the case. It depends on what type of joint title is used. Certain types of joint ownership protect each owner from claims or liens of the other owner(s). With other types of joint ownership, however, your interest in the property could be at risk because of a lien or claim filed against the co-owner(s).
If you have a beneficiary who concerns you, either because of his/her spouse or because he/she has an addiction/gambling problem, one option is to use a trust to pass down an inheritance. The assets legally belong to the trust until they are distributed to the named beneficiaries, meaning they will not be subject to the division of assets in the event of a divorce nor can they be squandered because the Trustee provides essential oversight. You can even use the trust terms to dictate how the assets can be used by a beneficiary.
Typically, the key to avoiding (or diminishing) estate taxes is to decrease your taxable estate. One commonly used tool for accomplishing that goal is the annual exclusion. This tool allows you to make gifts valued at up to $15,000 ($30,000 if you gift-split with a spouse) to an unlimited number of beneficiaries each year tax-free. Gift made using the annual exclusion do not count toward your lifetime exemption.
Transferring assets into an irrevocable trust can keep them out of the reach of most creditors. In fact, there are specialized trusts created just for this purpose. Another option is to use the proper type of joint title that prevents creditors of one owner from going after the property.
Medicaid planning is the key to avoiding the threat posed by the high cost of long-term care. As part of your Medicaid planning component you may create a special type of irrevocable trust known as a Medicaid trust. This trust will protect your assets and ensure that you qualify for Medicaid if you need it in the future.
If you have questions relating to how best to protect your assets within your estate plan, contact the experienced asset protection planning attorneys at Nash Bean Ford & Brown, LLP by calling 309-944-2188 to schedule your free consultation.