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Estate Planning – 10-Step Asset Protection Plan and Checklist Part I

Last update on: Aug 06 2020

Taxes, the IRS, attorneys, and estate processing costs are not the only enemies of your wealth.

More and more people are concerned about creditors, especially those created by lawsuits.

With the estate tax not a concern for most, insurance coverage being reduced, and law suits increasing, many people are more concerned with this potential leak of their wealth than they are about taxes.

Even those who aren’t afraid of being sued are concerned that creditors of their heirs might end up with the bulk of their estates.

Many people now are looking for asset protection strategies, including strategies that will protect wealth from the creditors of their heirs.

Fortunately, you can protect wealth without venturing into the world of offshore trusts, shady operators, and unethical or illegal schemes.

You also shouldn’t have to pay a fortune for an effective asset protection package. Let’s start with a few general principles.

Your state law, with some supplements from federal law, controls the specifics of asset protection.

Some states completely protect annuities and life insurance, for example, while other states protect them with limits. To be sure, you or a lawyer needs to check the local law.

Asset protection should not be done in a vacuum.

Asset protection should be considered as part of estate, tax, and investment planning. This has several benefits.

Asset protection is only one of your goals. Making it part of your other planning ensures that you don’t sacrifice other goals to asset protection.

Integrating the process also makes an asset protection plan more viable. A court is less likely to protect an asset if it appears a move was taken solely to thwart creditors. The plan would be viewed as a fraud on creditors.

When you show tax, investment, or business reasons for the plan, a court is more likely to uphold it. It is vital that asset protection planning be done before you have a real problem.

Once there is a problem with creditors, a court is likely to view any action you take as a fraudulent transfer.

Take action before there is a court decision or creditors are beating on the door, and a court is more likely to support your actions. Finally, don’t look for a magic bullet.

It is better to rely on a collection of asset protection strategies than to have your wealth depend solely on one method. Here is the toolbox from which to select asset protection strategies that will work for you…

Retirement Watch Asset Protection Plan Step #1: Insurance.

Now that insurers have recovered from the financial crisis, many types of insurance are fairly inexpensive for most people. Asset protection planning should supplement insurance, not replace it. An insurer will help defend you from claims and usually suggests ways to protect yourself. You should have significant liability coverage in your auto, homeowners’ and other property coverage. Also, don’t forget to have an umbrella liability insurance policy.

This insurance still is inexpensive and covers you for liabilities not covered under other personal policies. It is well worth the cost. You also need insurance to cover your business or professional activities.

Retirement Watch Asset Protection Plan Step #2: Spousal shield.

Unless your spouse also signed on to a debt or is a co-defendant in a lawsuit, his or her property cannot be reached by your creditors. There are several ways to use this shield. A simple transfer of title to your spouse works. There won’t be any gift taxes, because of the unlimited marital gift tax deduction. Of course, you cannot get the property back, and your spouse is free to do whatever he or she wants with it.

You also want to be sure that the property doesn’t come directly back to you if the spouse dies first. Instead, your spouse’s will should provide that the property will be transferred to a trust for your benefit that has a spendthrift clause, so that your creditors cannot reach the trust. Another strategy is property held jointly as tenants by the entirety. Not all states recognize this type of title. In those states that do recognize it, creditors of one spouse cannot force the property to be sold.

Only creditors of a joint debt can get the property. To get protection, the title must be tenancy by the entirety. Jointly held property and property held jointly with right of survivorship do not get this protection.

Retirement Watch Asset Protection Plan Step #3: Estate planning vehicles.

family limited partnerships and limited liability companies can be excellent parts of estate plans. They reduce gift taxes, get assets out of your estate, and still allow you a lot of control over the assets, as explained later in this report.

In addition, in most states the assets in the entity are protected from the creditors of the partners. Distributions from the entity could be claimed by creditors, but the creditors cannot force distributions, seize assets from the entity or seize a partner’s ownership interest.

Retirement Watch Asset Protection Plan Step #4: Annuities and life insurance.

This protection varies from state to state, as mentioned earlier. Some states fully protect annuities or the cash value in life insurance policies. Creditors might be able to get distributions as they are made, but they cannot seize the assets or force distributions. You might need to file for bankruptcy to trigger the protection. Check state law before making a purchase.

Retirement Watch Asset Protection Plan Step #5: Prepay for college.

Section 529 college savings plans are protected to some extent from creditors in at least 19 states. The protection varies, and you might need to be a resident of the state sponsoring the plan to get the protection. Another protection is to name the student as the owner of the account, but then you wouldn’t be able to control the account or get the money back if needed. A good strategy might be to name your spouse as owner of the account.

In next week’s edition of Retirement Watch Weekly, I’ll reveal the rest of my 10-step asset protection plan.

P.S. I often get asked, “what’s the most responsible thing you can leave behind for your loved ones?” There’s no single answer for every person, of course. But there is a comprehensive checklist I’ve put together that every American over the age of 50 should check out. Read more about it here.



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