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If you are like most people, when you hear “asset protection planning,” you think of people like Jeff Bezos or the Walton family. A common misconception is that only wealthy families and people in high-risk professions need asset protection planning. In reality, everyone is at risk of being sued and possibly losing everything they have worked hard to obtain. A car accident, foreclosure, medical crisis, or business failure could result in a huge monetary judgment, decimating your finances. You may also view the idea of asset protection planning with a skeptical eye, believing there is a moral obligation to pay your debts. In reality, the U.S. justice system is unpredictable. Defendants are faced with ever-expanding theories of liability, being sued because they appear to have “deep pockets,” and the possibility of a judgment against them based on a desired outcome instead of the law.  

What Exactly Is Asset Protection Planning?

Asset protection planning is a widely accepted and frequently used form of wealth and estate planning. It is the process of positioning property that could be vulnerable to seizure by future creditors, predators, and lawsuits in a way that discourages lawsuits, provides a valuable bargaining chip if a lawsuit arises, and minimizes loss. Asset protection planning is NOT about avoiding taxes, keeping secrets, hiding assets, or defrauding creditors.  

Basic, Everyday Asset Protection Planning Strategies

It may surprise you to know that you may already be taking advantage of basic asset protection strategies without knowing it. The first line of defense is insurance, including homeowner’s, renter’s, automobile, business, malpractice, long-term care, and umbrella policies. You should regularly check your insurance policies to determine if the policy limits are in line with your current assets and net worth, and to confirm that the coverage is still adequate and that the benefits have not been reduced to maintain the current premiums. In some states, married couples are afforded asset protection if they hold property as “tenants by the entirety” (TBE). With this type of ownership, the creditor of one spouse cannot attach a judgment to any property held by the couple as TBE. However, depending upon your state law, this protection may be limited to real property. Another type of basic planning is achieved through investments in 401(k)s or IRAs. Under federal law, 401(k)s and IRAs (excluding inherited IRAs) are protected from creditors in bankruptcy (with certain limitations). Maximizing contributions to your 401(k) if you are still working will not only increase your retirement savings, but will also keep investments outside of the reach of future creditors, predators, and lawsuits.  

Advanced Asset Protection Planning Strategies

If you are a landlord, real estate investor, or business owner, or if you work in a high-risk profession or have accumulated or inherited a significant amount of unprotected property, we highly recommend that you consider more sophisticated asset protection planning.   Lifetime QTIP Trust A QTIP lifetime trust is for a less wealthy spouse’s benefit and takes advantage of the gift tax marital deduction. Lifetime QTIP trusts offer a great deal of flexibility when spouses have lopsided estates. During the less wealthy spouse’s lifetime, that spouse will receive all of the trust income and may be entitled to receive the principal. If the less wealthy spouse dies first, the assets remaining in the trust will be included in his or her estate, thereby making use of the less wealthy spouse’s estate tax exemption. The remaining trust funds may continue in an asset-protected, lifetime trust for the surviving spouse’s benefit (subject to applicable state law). They will be excluded from the surviving spouse’s estate when he or she later dies and will ultimately be distributed to the wealthier spouse’s chosen heirs.   Spousal Lifetime Access Trust (SLAT) A spousal lifetime access trust is for your spouse’s benefit and takes advantage of the  annual exclusion for gifts and the lifetime gift tax exemption. Should you be sued and lose most of your assets, the trust funds would not be available to your creditors, and your spouse would still be able to access it to support you and your family. . After the first spouse’s death, distributions from a SLAT can be as broad or as limited as you choose.   Domestic Asset Protection Trust (DAPT) A domestic asset protection lifetime trust is for your benefit, and it primarily provides asset protection. The goals of a DAPT are to allow you to fund the trust with your own property, maintain an interest in the trust as a beneficiary, and protect the trust’s assets from your creditors. The laws governing DAPTs are continuously evolving, and there is limited case law interpreting them. Additionally, under bankruptcy law, trust assets remain exposed to creditors’ claims for ten years. Nonetheless, a DAPT can be a powerful asset protection strategy for the right person.  

Asset Protection Strategies for Your Family

Asset protection is not aimed solely at protecting assets for your enjoyment.  Depending on your family situation, you may desire to protect assets that will be passed to your beneficiaries at your death.   Irrevocable Life Insurance Trust (ILIT) An irrevocable life insurance trust holds life insurance proceeds for your intended beneficiaries. An ILIT is a powerful tool for implementing planning based on the generation-skipping tax exemption. In addition to asset protection, an ILIT can remove insurance proceeds from your estate for estate tax purposes and, with proper planning, it can provide much-needed liquidity for owners of illiquid assets such as farms, closely held businesses, or real estate.   Standalone Retirement Trust (SRT) Because a IRA inherited by a non-spouse beneficiary is not protected from the beneficiary’s bankruptcy creditors, the SRT can be an important tool for protecting inherited retirement accounts from the creditors of your beneficiaries.   Discretionary Trust In an irrevocable discretionary trust, funds are held and invested by the trustee and are only distributed on a discretionary basis according to your stated wishes. The purpose is to safeguard the trust funds for the benefit of beneficiaries who are (or may become) spendthrifts, married to overreaching spouses, or bad at managing money, or who are in high-risk professions or worried about being sued, rather than allowing those assets to be available to a beneficiary’s creditors. While it can be a standalone trust, this type of trust can also be built into other types of trusts.   Credit Shelter Trust A credit shelter trust is an alternative to leaving assets outright to a surviving spouse. As the beneficiary of the trust, the surviving spouse can benefit from the assets, but they are not part of his or her estate. They are unavailable to creditors and cannot be commingled with a new spouse’s assets.   Inheritor’s Trust An inheritor’s trust is a trust created for the benefit of a child or grandchild that is structured to allow the beneficiary some control over the assets while also protecting assets from the beneficiary’s creditors or spouse in the event of divorce. Typically, the beneficiary has the power to appoint or remove a trustee and to replace the trustee with a different one. The trustee has the authority to make distributions to the beneficiary.  

Plan Ahead

To protect your assets, you must plan ahead. Asset protection planning is not a quick fix for existing legal problems. In fact, if you transfer assets to shield them from existing creditors, it could be considered a fraudulent transfer, resulting in legal penalties.  Your plan must be in place before a lawsuit arises.  And, in some situations, a significant period of time must pass before the plan effectively protects your assets.   Everyone needs some form of asset protection. Availing yourself of legal tools to protect your assets from future claims is a responsible way to plan for your family’s future. Please call our office to schedule a consultation. . With our expertise, we can create, implement, and maintain an asset protection plan tailored to your family and financial situation.
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Tilden Moschetti
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