Simple Asset Protection Strategies to Defend Your Estate

Many people would like to grab part of your estate, and they know how to take it. Creditors could be targeting some of your property. A loved one could have a problem with gambling, substance abuse, or debt, leaving at least a por- tion of the estate vulnerable.

When you or one of your loved ones is at risk of a business or professional liability lawsuit, part of your estate could be awarded to a plaintiff. Gifts and bequests to your children or grandchildren could end up with their ex-spouses as part of a divorce settlement. Of course, there always are con art- ists, hustlers, and others looking to talk your heirs into spending or investing in certain ways.

Aggressive charities, and fake charities, could target your family’s wealth. Fortunately, you can significantly reduce the potential leakage of your estate from these risks. An important gap in many plans is the failure to review the asset protection elements with an estate planner. You don’t need the elaborate and expensive strategies, such as multi- ple foreign trusts and corporations that many people associate with asset protection. In fact, courts are becoming less tolerant of many of those strategies.

You need a strategy that is effective, affordable, and would trigger fraud alerts. Four key principles underlie an effective asset protection strategy. The plan needs to be flexible. You must be able to adjust it in line with changes in your goals, finances and family, as well as the legal and econom- ic environment. Asset protection always is evolv- ing.

In my Bob’s Journal of October 31, 2024, available on the members’ section of the website, I reported that California recently reduced its protec- tion of some retirement plan distribu- tions from creditors. A second principle is to use multiple strategies. Relying on one strategy or tool to protect most of your assets is very risky. The third principle is the plan must be cost effective. The fourth principle might be the most important. Your plan must be implemented before there’s a problem.

When you wait until there are active or looming claims, it’s too late. Most courts will ignore asset pro- tection moves taken after that point, labeling them as fraudulent con- veyances. Attorneys often refuse to implement strategies in that situation, because it puts their law licenses and sometimes their liberty at risk. The main goal of asset protection is to deter full litigation by convinc- ing the other side that collecting a judgment would be difficult. That gives them an incentive to settle for a reasonable amount.

Some of the elaborate asset pro- tection strategies emphasize secrecy. Those are the plans courts are most likely to ignore. Those plans also can encourage plaintiffs to search aggres- sively for all your assets and be confi- dent a court will rule in their favor.

For a strategy to work, there must be a justification other than asset protec- tion. When the sole intent appears to be asset protection, which is the case with the secret plans, courts are more likely to disallow the asset protection. A good asset protection strategy is part of a solid wealth planning and estate planning process for transferring wealth to others.

The first step in any wealth protec- tion plan is to have adequate insurance for both liabilities and damage to prop- erty. Supplement that coverage with a healthy personal umbrella liability in- surance policy, as discussed in the Au- gust 2024 issue of Retirement Watch.

With your estate planner and insur- ance professional, review the liability levels in the insurance for your home, autos, boats and any other property you own. Business owners and profes- sionals should have separate liability insurance for those risks. They might also want insurance for cybersecurity and product liability. Solid insurance coverage is essential to protecting your wealth. Insurers often pay for or have their attorneys handle your defense.

Also, when there’s adequate liability coverage, many op- posing attorneys will encourage their clients to settle for what the insurance will pay. The next steps are to determine how much of your wealth is in assets that are protected from creditors under state or federal law and consider converting more wealth into protected assets. These often are called exempt assets, because they are exempt from credi- tors’ claims. In many states, home equity, at least up to a certain amount, is exempt. Some states exempt unlimited or very high levels of home equity.

Retirement accounts often are exempt under federal and state law, including IRAs, as well as 401(k)s and other employer-sponsored plans. Sometimes assets are exempt only while they are in the plan. At other times, distributions from the plans also are protected from creditors.

Life insurance and annuities usually are protected. The list of protected assets and the details of the exemption are different from state to state, and protections un- der federal law probably don’t match your state law. To maximize protected assets, you’ll want to work with an estate planner or asset protection specialist who knows your state law’s details.

Some people move from one state to another because more of their assets will be exempt. Another step is to shift assets, so they are owned by entities that protect them from creditors. The rules here also vary considerably from state to state, but the irrevocable trust is the pre-eminent vehicle for protecting assets. A venerable strategy is to have assets owned by an entity, such as a limited liability company, partnership, or corporation. Then, transfer ownership of the entity to one or more irrevocable trusts.

You can create an irrevocable trust either during your lifetime or through your will, depending on when you believe asset protection is more im- portant. It is important that the trust be irre- vocable, meaning you generally can’t change it.

Assets you transfer to the trust no longer are legally your prop- erty and aren’t owned by your children or grandchildren. You can’t force the assets to be returned. To maximize asset protection, the trust should be an independent person or entity. Your children or grandchildren or both are the beneficiaries.

You can set up one trust that benefits the group or separate trusts for each beneficiary or group of beneficiaries. The children or grandchildren ben- efit from the trust’s wealth over time. Since your loved ones don’t own the assets outright, it should be safe from their creditors, potential ex-spouses, and others. It also is safe from their bad decisions about investments and spending. The trust agreement spells out when income and principal are distributed.

Most commonly, income to maintain a certain standard of living is distributed in the early years. Principal is distrib- uted in installments as the beneficiary reaches certain ages, such as 25, 30, 35, and so forth until it is fully distributed and the trust ends. But there’s no requirement that assets be distributed during the bene- ficiaries’ lifetimes. Some trusts last for generations.

To fully protect the assets, give the trustee discretion over the distributions. Some terms can be added to the trust for additional protection, which are discussed in the July 2024 Retire- ment Watch. The trust should allow what’s known as decanting.

That’s when the trustee or a trust protector essentially closes the trust and moves the assets to a new trust. Each state has limits on decant- ing. The new trust must be irrevoca- ble and have some other provisions matching the original trust. Decanting can be a valuable tool when there’s a major change in the law or the beneficiary’s circumstances, or there’s dissatisfaction with the trustee. You should work with your estate planner to carefully choose the state where the trust is located.

A trust is located where the trustee resides. Some states have laws that make them more attractive locations for trusts by allowing many of the protec- tions available through foreign trusts but at lower cost and without trigger- ing attention from the IRS. The most favorable states probably are South Dakota, Nevada, Alaska and Delaware, but don’t rule out others

. A potential disadvantage is that the state laws are fairly new and haven’t been tested in the courts. Also, the laws tend to have waiting periods. For example, all the asset protections might not kick in until the trust has owned the assets and been located in the state for at least four years. If you choose a state other than the one where you are resident, a bank or trust company probably must be the trustee. There are several other elements to consider for your asset protection plan. You can make outright gifts to others when the primary goal is to protect assets from your potential creditors. You also can consider transferring assets to a trust that benefits your spouse. The assets should be protected from your creditors, but you benefit from the trust indirectly when dis- tributions are made for your spouse’s benefit.

You also can sell assets. For example, you can sell an asset to family mem- bers in exchange for either a long-term installment note or a private annuity. You benefit from the payments, but your creditors might not be able to attach the asset. Don’t attempt this without the help of a good professional advisor. One strategy used with a personal residence or other real estate is to en- cumber it with debt. The asset has little equity, so it has little value to creditors.

You receive the loan proceeds and structure them to be safe from cred- itors. If you leave the proceeds in a financial account, it’s probably suscep- tible to your creditors. Of course, if you have substantial as- sets and are concerned these strategies won’t provide enough protection, you can consider working with an attor- ney to set up trusts or other entities in foreign countries with favorable asset protection laws. For most people, the best solution is a combination of strategies that vary with their goals, the assets they own, and whether their main concern is their creditors or what might happen with the next generation.