A lot of people think that estate planning is only about passing on your property after you pass away. However, that is only part of the benefits of a comprehensive estate plan. Protecting your assets in the event of a lawsuit, divorce, and bankruptcy is another purpose of estate planning.
You first have to understand that asset protection does not help you if you wait until something bad happens before you try to implement your asset protection. To get the full impact of asset protection, you have to proactively plan for any eventually long before you find out that something is even possibly happening against you. First, let’s cover the two main types of asset protection:
Asset protection for yourself:
Protecting your assets is the type of planning that has to happen before something can threaten your assets. Because this is a difficult strategy to implement, you should rely on your estate planning attorney to help you through this process.
Asset protection for your heirs:
Protecting your heirs’ assets means creating a discretionary lifetime trust for your beneficiaries rather than giving them an inheritance outright, in staggered distributions, mandatory income trusts, or other ways of passing on your property that offers less protection. There are a lot of options of how to do a discretionary lifetime trust, such as use an trustee independent of your beneficiaries or a co-Trustee with specific authority over distributions. Of course, you should not have to worry about all these options right now; your estate planning attorney will be able to walk you through these different options.
There are at least three situations in life that can require asset protection, and we will review each of these and how you can avoid them.
You hopefully will never have to declare bankruptcy, but sometimes a life event may lead to that. This may be a large recession or an expensive and unexpected illness. This may so severely impact your finances that you have to declare bankruptcy.
Bankruptcy Asset Protection Strategy: Asset Protection Trusts
You can put a lot of different kind of assets into an asset protection trust, not just cash. You can put real property, investments, personal belonging, and other kinds of assets into the trust. In order to create asset protection, you cannot be the trustee of the trust, but you can choose the trustee. Because these assets technically are no longer yours, and as long as the trust is funded, is irrevocable, and complies with your state’s laws, creditors cannot get to that property in bankruptcy. Again, you must create and fund this trust long before you know of a potential bankruptcy, and you have to comply with many requirements when you create the trust and as you maintain it. If your life situation suggests you should use an asset protection trust, they can be a great option for you.
Many people accumulate wealth with the goal of passing their wealth on to their children. A divorce can devastate the money you have saved up, either your divorce or a child’s divorce. The best way to protect your children from their divorce is to use a discretionary trust.
Divorce Asset Protection Strategy: Discretionary trusts
When you create a trust, your beneficiaries do not really own the property, the trust does. Discretionary trusts give your trustee complete discretion over distributions of income and principal and does not require your trustee to give income or principal to your beneficiary at any time. These trusts are a great strategy to protect your assets if a child gets divorced, and may minimize or eliminate the chance that a divorcing spouse can seize your trust’s property. There are again several options regarding naming a trustee and other decisions, but the important aspect about this kind of trust is the trustee’s discretion over distributions.
If someone ever sues you, your assets may be threatened. Most people think about insurance as a way to prepare for this, but you have other and additional options to further protect yourself more comprehensively.
Judgment Asset Protection strategy: Incorporation
Again, getting insurance is a great first line of defense. However, if you own a business, the type of corporate form can impact your personal protection. Limited-liability companies are great ways to protect your personal assets from lawsuits against your business. Contrary to common belief, it is easy to ruin this protection if you are not careful, so you should work closely with an attorney and other financial advisors.
Making your estate plan as good as you need it to be, including asset protection, is an important task. Contact The Rains Law Firm or schedule an initial client meeting to begin talking about how you can protect your assets.