If you have worked hard to acquire a decent asset portfolio, shouldn’t you work equally as hard to protect those assets from potential threats through proper asset protection planning? Of course, the answer to that question is “yes.” The problem is that most people do not realize the numerous and varied ways in which their assets might be at risk. Now is the time to learn more about those threats and about the asset protection strategies that can help ensure you don’t lose the assets you worked so hard to acquire.
Potential Threats to Your Assets
In today’s litigious culture, you are probably already aware of the threat a lawsuit can pose to your assets. Whether the lawsuit is based on valid allegations or completely frivolous, and whether you win or lose, you will likely expend considerable resources defending the allegations. A lawsuit, however, is hardly the only potential threat to your assets. Consider the following ways in which your assets may be at risk:
- Divorce – when you enter into a marriage you do so with the belief that you and your soon-to-be spouse will be together forever. If that doesn’t come to pass, the marital assets will be divided. If you failed to protect the assets you brought into the marriage through a well-designed asset protection plan, you could lose them in the divorce.
- Business debts and liabilities – people often believe that forming a corporation insulates them from any personal responsibility for the debts and liabilities of the business. In reality, that is not always the case. Creditors may be able to “pierce the corporate veil” and come after your personal assets.
- Children (and other beneficiaries) – sometimes, the biggest threat to your assets are the people you leave them to after you pass. A spendthrift beneficiary could squander your hard-earned assets in a very short amount of time.
- Long-term care – if you need long-term care during your “Golden Years” the cost of that care could rapidly deplete your assets if you failed to plan ahead given the fact that neither Medicare nor most private health insurance plans will cover LTC expenses. The average annual cost of LTC care nationally is over $80,000.
- Estate taxes – Estates are subject to federal gift and estate taxes at the rate of 40 percent. If the combined value of all lifetime gifts and assets owned at the time of your death exceeds the current lifetime exemption, your estate may lose a significant portion of its value to Uncle Sam if you failed to properly plan.
What Can You Do to Protect Your Assets?
Acknowledging the myriad and varied potential threats to your assets is only part of the equation. The implementation of asset protection tools and strategies within your comprehensive estate plan are of equal importance. Some of these strategies are relatively simple to understand and implement, while others are complex concepts that require the assistance of a professional to integrate into your plan. The key to protecting your assets is knowing which strategy works best to protect against a specific threat. This is where an experienced estate planning attorney can help. It may also be beneficial to learn more about some commonly used assets protection tools and strategies, such as:
- Pre-nuptial agreement – previously, the mere mention of a pre-nuptial agreement would send a prospective bride/groom packing. However, with second (and subsequent) marriages now the norm, it is fairly common for future spouses to enter into a pre-nuptial agreement to ensure the assets they bring into a marriage remain available to pass down to pre-existing children. A word of warning though – make sure you do not commingle separate assets as this can turn them into marital assets despite the terms of a pre-nuptial agreement.
- Transferring title – sometimes, protecting assets from creditors or lawsuits can be as simple as transferring the asset out of your name to a spouse or to adult children. Be careful that doing so does not amount to a fraudulent transfer.
- Irrevocable trusts – once assets are transferred into an irrevocable trust they become trust property, meaning they are no longer owned by you. If you do not own the assets, no own else can get to them to satisfy debts or claims as long as the transfer into the trust was not fraudulent.
- Forming the right type of business entity – although a true corporation does protect the shareholders (owners) from personal liability, forming a corporation doesn’t always work as people anticipate, nor is it always the best choice of legal entity for business succession purposes. Sometimes other entities may provide a better fit, depending on your state law and your particular goals.
- Medicaid planning – because Medicaid uses a five-year look-back period, transferring assets when you realize you need to qualify for Medicaid won’t work. What will work is the inclusion of Medicaid planning strategies in your estate plan long before the need for Medicaid eligibility arises.
- Lifetime transfer of wealth – planning for the impact of gift and estate taxes should begin long before your death. One strategy is to transfer as much wealth as possible during your life to diminish the value of your taxable estate at the time of your death. One tool to make use of is the yearly exclusion which allows every taxpayer to make tax-free gifts valued up to $14,000 to an unlimited number of beneficiaries each year. Other strategies involve spending the value of your assets through decanting.
The best way to ensure your assets are protected, and remain available to provide for loved ones after you are gone, is to work closely with an experienced estate planning attorney to incorporate an asset protection component into your comprehensive estate plan.