1st Feb 2012
It is a natural inclination to want to protect the assets that you have worked hard to obtain. There are many levels of asset protection and the proper method must be determined depending not only on the type of asset, but also on the possible source, timing and likelihood of a threat. However, the key to asset protection, much like estate planning in general, is that is must be put into place well before it is needed, because by the time it is needed, it is often too late.
Transfers of property that occur specifically for the purposes of hindering, delaying or defrauding creditors will be considered fraudulent. There are many factors that a court will consider when determining whether a transfer was fraudulent, but the best way to avoid such a determination is to protect your assets before the claim arises.
Below, I will discuss some of the asset protection techniques that are available to individuals through estate planning to limit their liability against potential creditors.
For most couples, this is the preferable method of title on the primary residence because it offers the greatest asset protection against a forced sale of the home. However, in certain circumstances, titling the home another way, such as in trust, may be preferable, so it is always important to consult with an experienced attorney when considering the options for titling your home.
For a detailed discussion on protecting a child’s inheritance, please see the May 2011 Newsletter.
By separating the business assets from personal assets, the owner can protect the personal assets from liabilities of the business. Additionally, depending on the structure and ownership of the LLC, the business can serve as a deterrent against personal creditors of the owner.
Irrevocable Trusts are commonly used to hold life insurance policies on the life of the grantor or his or her spouse. Since the grantor may not amend the terms of the trust, is not a beneficiary of the trust and may not withdraw the trust assets, such assets are not considered the grantor’s property and are thus protected from his or her creditors.
Other common Irrevocable Trusts include Grantor Retained Annuity Trusts (GRATs), Qualified Personal Residence Trusts (QPRTs) and Dynasty Trusts.
In states that offer the Domestic Asset Protection Trust option, there are also laws providing a statute of limitations or look-back period for transfers to a Domestic Asset Protection Trust, typically two to four years. Additionally, the statute of limitations for bankruptcy protection for such trusts is ten years. Thus, this arrangement must be undertaken very carefully and well before any threat from a creditor emerges.
As mentioned above, the benefits of asset protection must be considered when you are building wealth, not when you need to protect it, in order for it to be effective. There are many threats against your assets. By discussing your assets, circumstances and potential threats with an experienced estate planning attorney, you can determine the techniques that best suit your needs to protect your assets for you and your family.