Asset protection is the concept of and strategies for guarding one’s wealth. Asset protection is a component of financial planning intended to protect one’s assets from creditor claims. Individuals and business entities use asset protection techniques to limit creditors’ access to certain valuable assets while operating within the bounds of debtor-creditor law. Asset protection helps insulate assets in a legal manner without engaging in the illegal practices of concealment (hiding of the assets), contempt, fraudulent transfer, tax evasion, or bankruptcy fraud. Experts advise that effective asset protection begins before a claim or liability occurs, since it is usually too late to initiate any worthwhile protection after the fact.
Some common methods for asset protection include asset protection trusts; accounts-receivable financing and family limited partnerships (FLP). If a debtor has few assets, bankruptcy may be considered the more favorable route compared to establishing a plan for asset protection. If significant assets are involved, however, proactive asset protection is typically advised. Certain assets, such as retirement plans, are exempt from creditors under United States federal bankruptcy and ERISA (Employee Retirement Income Security Act of 1974) laws. In addition, many states allow exemptions for a specified amount a home equity in a primary residence (homestead) and other personal property such as clothing. Each state in the United States has laws to protect owners of corporations, limited partnerships (LPs), and limited liability corporations (LLCs) from the entity’s liabilities.
Asset Protection and Real Estate
Jointly-held property under the coverage of tenants by entirety can work as a form of asset protection. Married couples who hold mutual interest in property under tenants by entirety share a claim to a whole piece of property and not subdivisions of it. The combined ownership of the property means that creditors who have liens and other claims against one spouse cannot attach the property for their debt reclamation efforts. If a creditor has claims against both spouses, the tenants by entirety stipulations would not protect the asset from being pursued by that creditor. Some attempts at asset protection include putting the property or financial resource in the name of a familiar member or other trusted associate. For example, an heir might be gifted ownership of real estate or other property while the actual owner continues to reside on the property or make use of it. This could complicate efforts to seize property as actual ownership must be determined. Financial accounts may also be domiciled in offshore banks in order to legally avoid paying taxes against those funds.
Here’s a list of pros and cons to assist in that effort:
• Bankruptcy protection
• Divorce protection
• Protects inheritance from lawsuit
• Keeps assets in the family (for grandchildren or other children) upon the death of a child
• Provides for management of assets for children who may need assistance
• Permits child or child’s spouse to qualify for public benefits without spending down inheritance
• Avoids taxation of inherited assets upon child’s death
• Cost of creating trust
• More complicated to have separate trust account
• Need to file annual tax return for trust
• Works only if child follows trust rules
• Stronger protection if trust uses independent trustee, which may entail loss of control and ongoing trustee fees
• Little benefit if child will quickly spend the inherited funds
Estate planning is a stressful thing. Nobody likes to consider their own mortality, and making end-of-life plans puts it in square focus. However, it’s important for everyone to arrange these plans so that your descendants and assets are cared for, even ensuring that your affairs are kept in order should you become unable to make certain decisions for yourself. One of the more popular ways to protect your assets, medical decisions and finances is by using a trust. A trust enables you to maintain a level of control over how your money is spent. There are, however, certain benefits and risks associated with this approach. Explore the various pros and cons of using trusts when it comes to estate planning, and how an estate planning attorney can help you make the right choice.
A trust is an asset pool held for the benefit of and use by a third party, or beneficiary. This beneficiary is doled out assets as controlled by a trustee. There are two basic kinds of trusts: those established in a will, or living trusts determined while you’re still alive. Trusts last until a certain set of predefined conditions are met. For example, you could design a trust for a young heir to become accessible when they reach 18 years old, at which point the trust ends and the inheritance transfers completely to them. As the creator of the trust, you are the settler. In the case of a living trust, you can also be the trustee.
Benefits of a Trust
There are several benefits to using a trust. The most important is that it tends to be more efficient than simply doling out assets in a will. It allows you specific means of allocating assets through using specific, controlled manners. It also helps to avoid estate taxes, and gives you control over how your beneficiary will receive your assets. In brief, a trust ensures a beneficiary won’t squander their inheritance. A trust can also be used in case you become incapable of making decisions for yourself. It can guarantee your medical care is covered, and your daily expenses and bills are paid. If needed, it can provide for someone to take over as caregiver. The drawback of a trust is that it can be more complex to set up than a will. Arranging a trust takes effort, funding and time. More notably, you can’t simply take a trust back after you establish it. You have to take particular steps to revoke a trust, and then you’ll have to redefine how the assets are distributed. A revocable trust can circumvent some of these problems, but this adds an additional layer of complication.
Working With a Trusts Attorney
If you’re considering creating a trust for your property, you’ll want the best possible advice. A qualified attorney can make sure you take the right steps and avoid critical mistakes, ensuring your assets are well protected and your heirs are well cared for.
Asset Protection in a Revocable Living Trust
Generally speaking, if asset protection is your goal, a revocable living trust is not the proper vehicle for your purposes. The settler, or person who creates the trust, essentially retains control and ownership of the trust’s assets, meaning they can remove assets from the trust or change the trust terms at any time, while the trust itself simply holds title to the assets. In the event a creditor wins a lawsuit against the settler, the court can order the payout of trust assets in settlement of the creditor’s claim. Although revocable trusts do not offer asset protection, they have other benefits when it comes to estate planning. For example, such trusts can be helpful in avoiding probate fees when the settler passes.
Asset Protection in an Irrevocable Trust
In order to properly protect your assets, you need an irrevocable trust. As its name suggests, once such a trust is created, you cannot revoke it yourself by changing its terms, nor do you have control over the trust’s assets. Instead, the trust’s assets are in the control of the trustee, or person assigned to manage the trust, and any changes or distributions are at the trustee’s discretion. If a creditor files a lawsuit against you, the assets in the trust will likely not be considered yours, so even if the creditor wins judgment against you, the chances are much better that the assets residing in the irrevocable trust will be protected.
Domestic Asset Protection Trust
There are two kinds of irrevocable trusts that work as asset protection vehicles: domestic asset protection trusts and foreign asset protection trusts. A domestic asset protection trust can be established within the U.S. in any of the states that provide legislation permitting the creation of such trusts. Not all states provide for asset protection trusts, so it’s important that you consult with an estate planning adviser or online service provider to determine which state, if any, is best to set up such a trust. However, as these trusts have become more common, more and more states have come to recognize the legal status of such trusts. Note that it is less costly to set up an asset protection trust in the U.S. than it is to create a foreign asset protection trust. Because these trusts are fairly new, the case law concerning their treatment is constantly evolving, which adds a level of uncertainty to their ability to properly protect assets. Most states have a limitation period during which assets transferred into such a trust remain vulnerable to creditors.
Foreign Asset Protection Trust
The foreign asset protection trust, also known as an offshore trust, provides more effective protection for your assets. Such trusts are established in jurisdictions outside of the U.S. which provide more stringent protection for trusts and their assets. Because your trust is in a foreign jurisdiction, it’s governed by the laws of that jurisdiction rather than by U.S. laws. Although they are usually more costly than their domestic counterparts, foreign asset protection trusts generally have more stringent privacy measures, making it harder for others to learn the trust terms and assets. Another benefit is that jurisdictions that promote themselves as offshore trust havens usually do not enforce U.S. judgments against assets of trusts formed in their jurisdiction.
In many cases, assets of a foreign asset protection trust are held in an offshore account. While this provides more protection from a U.S. court-ordered seizure of assets, it does expose the assets to potential economic and political risks associated with the jurisdiction in which the offshore account is held. Today many estate planning firms tout the benefits of Offshore Asset Protection Trusts as instant asset protection solution for every individual looking for the end-all, be-all. It feels to them like finding the last raft on a ship that has a pin-sized hole in it. Their first instinct is to throw out the raft and jump off the boat immediately. Unfortunately, things since 9/11 and the global financial crisis of 2008 have changed in this country. Prior to 9/11 we recommended offshore trusts for a much larger percentage of clients, but that is no longer the case.
Why an Offshore Asset Protection Trust is a Bad Idea for Most People
Because of the new regulations from the Patriot Act and subsequent banking acts, offshore asset protection trusts are very expensive to maintain. Going offshore to establish asset protection trusts means going out-of-pocket for between $5,000 to $10,000 per year in maintenance fees. Because of these expenses, many of these offshore trusts will only last about three to four years for the average individual, particularly if they were created in a rush to thwart a perceived upcoming risk; for this reason, grantors often question whether their hasty decision was indeed the right one at the time. There are quite a few mandatory and compliance forms to file when going offshore.
At a minimum, there’s Treasury Department form 90-22.1, Report of Foreign Bank and Financial Accounts to consider. There may also be a requirement to file a Foreign Bank Account Report (FBAR), which falls under the authority of the Financial Crimes Enforcement Network (FinCEN) form 114. Aside from filing TD and FinCEN forms, offshore trust grantors may also have to respond to the Internal Revenue Service (IRS) by filing forms 3250 and 3250A. These forms, which require disclosure of trust assets, are handled by a foreign trustee and a CPA based in the United States. As of December 31st, 2012, the U.S. Foreign Account Tax Compliance Act (FATCA) is creating an additional burden on offshore trust grantors and trustees by requiring financial institutions abroad to report on the financial holdings and income of their clients. With the new filing and compliance requirements also comes uncertainty as to how offshore trusts are managed. It calls for retaining the services of an attorney to work in conjunction with the foreign trustee. If you take into consideration all of the aforementioned factors, it is easy to see the $10,000 annual maintenance cost of an offshore trust.
Medicaid Asset Protection Trust
While one of the primary purposes of an asset protection trust is to protect the settlers’ assets from creditors’ claims, such a trust can also be used to help make you eligible for Medicaid by reducing the assets in your name. If you are planning to set up a trust for this purpose, it’s important to consult with an adviser with experience in this area, as not every trust can help you comply with Medicaid’s eligibility requirements. An asset protection trust can be a vital estate planning tool. Because it’s crucial for such a trust to be set up properly, consult with an adviser with expertise in asset protection matters.
Here are some of the ways the assets can be siphoned off:
• Failure to pay child support or alimony. The courts could order those payments withdrawn from the assets. Retroactive and future payments could “wipe out” the assets.
• Debts due to state and federal governments. That could take the form of taxes not paid or a fine that is imposed as part of a sentence in a civil legal action.
• Payment due those who have provided services to the beneficiary associated with the trust.
Factors to Consider When Opting For Asset Protection Trusts
Securing your assets through foreign asset protection trusts are a lot more useful and inexpensive than you possibly could imagine. However, potential settlers must cautiously assess different offshore trust jurisdictions and make sure that their interests will be given high priority. It is also important that they seek professional advice to ensure optimum benefits. Here are some of the things that one should bear in mind in choosing the right jurisdiction for an offshore trust.
• Make sure that a prospective jurisdiction does not give foreign judgments against the assets that are transferred to a valid or legal trust within its jurisdiction. However, the assets that come from criminal activities such as fraud should be duly exempted. It should also have foreign trust laws that are favorable to your specific needs.
• Political and economic stability is crucial in choosing the right jurisdiction. A country that is politically and economically unstable or underdeveloped can only provide weak asset security. Furthermore, it is often characterized by ineffective financial infrastructures that give you fewer credible banks, lawyers and trustees to choose from.
• It should allow the formation of irrevocable trusts which could give the settler the ability to keep the powers related to the ownership of the asset protection trusts and all of the properties involved therein.
• It is not advisable to invest your assets in non-sovereign nations. This is because they may be under another country’s jurisdiction that may not be beneficial to your interests.
Asset Protection Lawyer Free Consultation
When you need legal help with asset protection, trusts, wills, probate or other estate planning and administration issues, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506