Asset protection
The term asset protection refers to strategies for protecting one’s assets, property, or wealth. Whether you are a regular individual, real estate investor, or parent, you are bound to have something that you would like to safeguard for yourself, your children, or loved ones.
Many things can qualify as assets, from your home to car or expensive jewelry you bought or received as a gift.
Protect Assets for a Special Needs Person: One of the easiest mistakes to make is to not account for the specific planning requirements of special needs individuals. Most special needs people receive some form of government assistance and outright gifts or inheritances risk the continuation of this assistance. The most common way to protect your loved ones who have special needs Is through a Special Needs Trust (link to Special Needs page). This provides a way to ensure your loved one has access to all he or she needs, without putting ongoing government assistance at risk.
Protect your Children’s Inheritance: In case of life eventualities like death or divorce, asset protection can ensure your children’s inheritance is safe from misuse.
Protect Assets from Unnecessary Taxes: Yes, you have to pay taxes. No, you shouldn’t feel guilty about leveraging all legal tools to minimize the amount of those taxes. One of the key components of any estate plan is planning to mitigate how much of your estate goes to the government. Proper attention to tax planning helps maximize the amount of your assets that go to your loved ones.
Insulate Assets from the Rest of Your Estate: It’s always a good idea to insulate assets like rental properties from your personal residence and personal assets. Here’s why: if a tenant is injured in a rental property, you want to limit the scope of what he or she can collect against the property site of the accident. If you own that property in your individual capacity, your tenant would be able to enforce a judgment against your own home and your personal property.
There are many asset protection tools to consider. The most notable include;
1. Trusts
Trusts are versatile asset protection tools that can be utilized for many different purposes. Different types of trusts are ideal for different purposes. Some trusts are better for estate planning purposes, while others are ideal for protecting assets from potential creditors. There are many reasons to employ trusts in your estate and financial planning.
Revocable living trusts are great tools for individuals who want to protect their assets from probate – an annoying and time wasting court process that takes place when you pass having only a will or no plan at all. Revocable living trusts also offer individuals control over assets during a lifetime. However, the control means creditors can target the trust since you retain ownership of assets held in the trust. You can learn more about revocable living trusts here.
Irrevocable trusts are better for protecting assets and for tax planning, although they limit control over the assets you place in the trust. You can learn more about the wide range of irrevocable trusts here, but suffice it to say irrevocable trusts are powerful instruments enabling you to minimize taxes (AB trusts, SLATs, etc.) and insulate assets from both creditors and unwanted claimants on the property.
It’s important to speak with an asset protection specialist for guidance before setting up any trusts. Irrevocable trusts, especially, are important to get right the first time, as you might not be able to modify it after it has taken effect.
2. LLCs
Trusts aren’t the only asset protection vehicles to use. Setting up LLCs (limited liability companies) to hold assets effectively protects assets from being targeted by creditors. LLCs form a legal shield against a person’s property. Your personal assets won’t be touched if you conduct business and borrow using an LLC as opposed to your own name.
However, creditors can still seize the property of individuals with membership interest if your LLC fails to follow corporate formalities. It takes an expert to set up an LLC as an adequate asset protection tool. For instance, instead of simply placing assets under an LLC, it is smarter to protect membership interest using a protective trust.
3. Powers of Attorney
A power of attorney can be defined as a legal document that gives one person (attorney-in-fact) powers to act for the principal (the other person). This tool allows a person to make decisions on your behalf on financial, medical, and property matters when you are ill, absent, or incapacitated.
Your property is exposed if you can’t manage it or haven’t left a competent and trustworthy person to manage the property if something bad happens to you. If you don’t trust the default/automatic beneficiary of your assets to handle the responsibility properly, you know what to do!
4. Prenuptial Agreements
If you wish to protect your property in case of a divorce, one strategy is to enter into a prenuptial agreement. Prenups are useful tools for asset protection because they stop ex-partners from seeking property they didn’t earn rightfully. While there are several options that can achieve the same results as a prenup, the fundamental goal of a prenup is to establish an understanding of the status quo entering the marriage and plan for the possibility of a split. Like many types of estate planning, the idea is to set ground rules to achieve predictable outcomes.
Asset protection lawyers are the best-suited professionals to craft asset protection strategies and select tools that work for your specific situation. The importance of legal expertise can’t be overstated when setting up trusts, LLCs, powers of attorney, and other asset protection tools. We feel so strongly about the need for expert help we’re adding an additional disclaimer here: these strategies should be executed by trained professionals. Don’t try this at home.