Financial Advice for Retirement, Social Security, IRAs and Estate Planning

10 Simple Ways to Protect Your Assets, Part II

Published on: Sep 10 2019
estate planning

Here’s Part II of my retirement Asset Protection Plan. To review Part I, click here.

6. Create trusts. Irrevocable trusts usually protect assets from creditors of either the grantor or the beneficiaries of the trust. They also ensure that the assets are out of your estate for tax purposes.

A good asset protection trust should have a spendthrift clause, which shields assets from creditor claims. Spendthrift clause protection differs from state to state.

Some provide unlimited protection; others limit the protection. Also, an independent party should be trustee.

Many asset protection planners recommend carefully choosing the location of the trust and its trustee. The most aggressive strategy is to locate the trust in a foreign country, especially one with strong asset protection laws, though those are rapidly diminishing.

Courts, however, have found ways to break down the effectiveness of these trusts. Most asset protection planners acknowledge that the real benefit of an offshore trust is that many creditors will be discouraged by the time and expense involved in breaking the trust and will write off the debt instead of pursuing the claim.

A number of states now are offering asset protection trusts similar to those found offshore. The trust laws are relatively new, and there tend to be restrictions such as that assets have to be in the trust for at least four years to be protected.

It isn’t clear how U.S. courts, especially those in a state different from the trust’s location, will respect and interpret the law. Yet, they are a less expensive alternative to an offshore trust.

A number of states now are offering asset protection trusts similar to those found offshore. The trust laws are relatively new, and there tend to be restrictions such as that assets have to be in the trust for at least four years to be protected.

It isn’t clear how U.S. courts, especially those in a state different from the trust’s location, will respect and interpret the law. Yet, they are a less expensive alternative to an offshore trust.

You could set up a simple irrevocable trust for the benefit of your children. Or you could have multiple layers.

For example, a trust can serve as a partner of a family limited partnership. Or you can name someone as a trust protector, and the protector directs a trust that owns most of a family limited partnership. These multiple layered plans are expensive to create and maintain.

7. Bankruptcy exemptions. Ideally you want to protect your assets without filing for bankruptcy. As a fallback, however, you should examine the bankruptcy exemptions in your state and consider arranging asset ownership to maximize protected assets.

Most states protect a home of up to some value from creditors in bankruptcy. In some states there is an unlimited homestead exemption.

You can own a home of any value and have it protected from bankruptcy creditors. There might be minimum residency periods or other requirements to receive maximum protection. Some bankrupts have protected assets by purchasing expensive homes in one of these states even after losing court cases.

8. Retirement accounts. The protected amount for retirement accounts varies by state and by the type of account. In most states, IRAs receive a limited exemption while profit-sharing plans and corporate retirement plans are fully exempt.

When a creditor claim seems likely, it might be possible to set up a business, create a retirement plan, and roll an IRA into the business retirement plan. Federal bankruptcy law provides full protection for IRAs and other qualified retirement plans for the original owner (but not for beneficiaries who inherit), but each state has its own law and doesn’t have to follow the federal rules.

9. Aggressively manage assets. Some assets are difficult to protect from creditors, yet you might be able to protect equity in the asset. For example, you can borrow against the equity in real estate and put the loan proceeds in a trust, family limited partnership, or other vehicle with more protection.

A variation is to identify assets that are difficult to protect and sell them for cash. Then, protect the cash.

10. Consider a charitable trust. The charitable remainder annuity trust can be a great estate planning tool. It works with appreciated assets such as real estate or stocks.

You contribute the asset to the trust and take a tax deduction for a portion of its fair market value. No capital gains taxes are due on the appreciation. You receive a regular annuity payment for life from the trust, and the amount left in the trust at your death goes to a charity you designated.

In a state that protects annuities, the income stream from this trust is likely to be protected in bankruptcy. A variation, known as a unitrust, pays a fixed percentage of the trust instead of a fixed amount. That provides inflation protection. Unfortunately, the unitrust might not get the protection an annuity trust receives.

These are examples of simple, relatively low-cost ways to protect assets from lawsuits and creditors. Consider these before undertaking an expensive asset protection plan if you’re concerned with protecting the assets from creditors.

Publisher’s note: In as little as four weeks from now, you could be collecting your first “extra” Social Security payout. What is it, exactly? And how do you know if you qualify? Click here for all the details.

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