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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 could result in the loss of assets because of 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 not thought of, but that you need to consider when creating your estate plan.
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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 thought about that could do the most harm. Have you considered, for instance how the divorce of a beneficiary could 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 end up with 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 won’t cover much, if any, LTC expenses, you may be forced to turn to Medi-Cal for help; however, you may have to use personal resources to pay your LTC bill until Medi-Cal eligibility is established.
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Asset protection refers to the tools and strategies incorporated into an estate plan to prevent various threats to your assets from causing you to lose some, or even all, of your assets. An asset protection attorney will evaluate your estate plan and look for areas where your assets could be vulnerable and then suggest tools and/or strategies that will help protect those assets.
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You may have heard a lot about how a trust can be used to protect assets. It is true that certain trusts can protect the assets held by that trust; however, it must be the right type of trust and the trust agreement must be properly drafted. One type of characterization of trusts is testamentary trusts and inter vivos (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 trusts. A revocable trust can be modified or revoked by the Settlor without the need to provide a reason whereas an irrevocable living trust generally 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 typically not protected from creditors and other threats. Assets transferred into an irrevocable living trust, however, irrevocably become property of the trust and are generally out of reach of the Settlor and do extend certain creditor protection.
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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 extend the owners are protected from claims against co-owners. 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). Make sure you understand what type of joint ownership to have and how that type of title does, or does not, protect you.
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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:
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- Gift and estate taxes – 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 gift exclusion. This tool allows you to make gifts valued at up to $17,000 in 2023 (or $34,000 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.
- Divorce – This protection can often be accomplished by entering into a pre-nuptial agreement prior to the marriage, if both parties are willing and the agreement meets the legal standards for such an agreement. One thing you also need to avoid is inadvertently “co-mingling” assets during the marriage which could transmute your separate property into community 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 to your child, meaning they will normally 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 the assets.
- Creditors –transferring assets into an irrevocable trust can keep them out of the reach of creditors, as will using the proper type of joint title.
- Long-term care costs – Medi-Cal planning is a key to avoiding this threat. As part of your Medi-Cal planning component, you may consider create a special type of irrevocable trust known as a Medi-Cal trust. This trust will protect your assets and ensure that you qualify for Medicaid if you need it in the future.
The above strategies often involve sophisticated planning tools that require the skills of an experienced and qualified estate planning attorney. There are many questionable “experts” on the internet and promoting fee seminars that proclaim asset protection for very dubious strategies. It is in your best interest to avoid these unqualified persons to prevent getting involved in a high cost, unworkable scam.
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Creating an estate plan allows the creator 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 goal of yours, then you undoubtedly also want to protect the 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 do just that. Below are some frequently asked questions related to asset protection to help you better understand how you can utilize your estate plan to help protect your hard-earned assets.
Contact Us
If you have specific questions regarding the best way to incorporate business succession planning into your estate plan, contact us at Northern California Center for Estate Planning & Elder Law by calling (916)-437-3500 to schedule your appointment today.
