Asset Protection Planning

One of the primary reasons for creating an estate plan is typically to ensure that estate assets are distributed according to the creator’s wishes when the time comes to do so. If that is a motivating factor for you, then you undoubtedly also want to protect the hard-earned assets you acquire over the course of your lifetime. Fortunately, there are numerous assets protection tools and strategies that can be included in your comprehensive estate plan to help you achieve your goal of preserving assets. To help you better understand the importance of including asset protection measures in your plan, the Texas asset protection planning attorneys at the Mendel Law Firm L.P. have put together the answers to several frequently asked questions about assets protection planning.

There are some common threats to your assets that you may have already thought about, and maybe even planned for in your estate plan. Among those are things such as your own divorce, which can result in the loss of assets due to the required division of marital assets. Economic downturn and failed business ventures are also things people typically recognize as possible threats to their assets along with the impact that federal and/or state gift and estate taxes could have on your estate assets. While these threats are fairly well-known, there are other ways in which your assets may be at risk that you have probably not thought of, but should consider when creating your estate plan.

The key to preventing harm is knowing about the possibility of that harm so you can plan accordingly. As such, it is the threats you may not have considered that could do the most harm. For example, how would the divorce of a beneficiary impact your assets? If your daughter and son-in-law decide to end their marriage, and you already gifted assets to your daughter, your son-in-law could receive some of those assets in the divorce. The high cost of long-term care (LTC) is another huge threat to your assets, though you may not know it. Because Medicare will not cover LTC, you may be forced to turn to Medicaid for help; however, if your countable resources exceed the (very low) program limit you my be forced to use those resources to pay your LTC bill until Medicaid will assist with your expenses for care.

Asset protection refers to the tools and strategies incorporated into and estate plan to prevent the various threats to your assets from causing you to lose some, or even all, of your assets. An assets protection attorney will evaluate your estate plan and look for areas where your assets could be vulnerable and then suggest strategies that can help protect those assets.

You may have heard a lot about how a trust can be used to protect assets. It is true that a trust can protect the assets held by the trust; however, it must be the right type of trust and the trust agreement must be properly drafted. 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 trusts can be further sub-divided into revocable and irrevocable living trust. A revocable living trust can be modified and 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 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 from threats.

Care should always be taken when deciding how to hold title to property that is jointly owned. Each state determines what types of joint ownership are recognized and to what extent the owners are protected from claims against co-owners. Certain types of joint ownership protect each owners from claims and 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). It’s important that you understand what type of joint ownership to have for each of your assets and how that type of title does, or does not, protect you.

The asset protection tools and strategies you use in your plan will be as unique as your overall plan is; however, some common asset protection strategies include: • Gift and estate taxes – the key to avoiding or mitigating 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 to an unlimited number of beneficiaries each year tax-free. Gifts made using the annual exclusion do not count toward your lifetime exemption. • Divorce – this is easy enough to accomplish by entering into a pre-nuptial agreement prior to marriage, if both parties are willing. One thing you also need to avoid is “co-mingling” assets during the marriage which turns your separate property into marital property. • Beneficiaries – if you wish to make gifts to children, or others that concern you, one way to avoid the possibility of losing those assets in a divorce or squandering the assets is to use a trust to gift those assets. The assets legally belong to the trust until they are distributed by your child, meaning they will not be subject to the division of assets in the event of a divorce nor can they be squandered if the Trustee provides oversight as to the use of assets. • Creditors – transferring assets into an irrevocable trust will keep them out of the reach of creditors, as will using the proper type of joint title in some states. • Long-term care costs – Medicaid planning is the key to avoiding this threat. 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 qualified for Medicaid if you need it in the future.