Asset protection planning is defined as the adoption of advanced planning techniques which will place assets beyond the reach of future potential creditors. It is not hiding assets, committing fraud or perjury, or engaging in fraudulent transfers. Today, asset protection planning is a concern for everyone. Many consider today’s social and economic environment both more litigious and more hazardous to the preservation of wealth than in years past. Over the past few years, we can see a rise in the areas of liability, in jury awards, and the high incidents of divorce. You work hard for your assets; now you need to protect them!The management, preservation and distribution of wealth are primary goals of estate planning. In the past, estate planners focused more on minimizing estate taxes. Today, the estate planner must consider asset protection planning with equal weight.
In basic estate planning documents, the estate planner will take advantage of the maximum tax credits afforded to individuals for estate (unified credit) and generation skipping transfer tax planning (GST exemption). Using these credits minimizes the amount of tax that must be paid to the Internal Revenue Service, or state taxing authorities, at death. Thus, the maximum amount of assets will pass to your heirs. This type of planning can also be completed during an individual’s lifetime. Through carefully drafted estate planning documents, assets can be transitioned during life or at death to your heirs with the minimum imposition of estate, gift and generation-skipping transfer taxes.
The unified credit shields property from tax, regardless of to whom such property passes. The amount shielded by the unified credit is known as the “applicable exclusion amount.” For 2007, the applicable exclusion amount is $2,000,000. This amount increases until 2010, when the estate tax is repealed,as follows:
Year of Applicable Exclusion
2006, 2007 and 2008
It is advantageous for property to pass tax free as part of the applicable exclusion because the applicable exclusion escapes tax at death. The GST exemption is currently $2,000,000 and permits property to pass generation to generation tax free.
In estate planning documents, assets can be transferred to heirs outright or in trust. The best asset protection is to pass the assets to your heirs in lifetime trusts. A trust can hold the assets for the benefit of a beneficiary and allow the beneficiary to have the full benefits of the assets. If the trust provisions are drafted properly, a creditor cannot reach the assets and the assets are protected from the creditor. With proper drafting, the beneficiary can also be their own trustee.
With our aging society, one of the most important types of asset protection planning is planning for future disability. Any individual requiring assisted living or nursing home care will incur substantial costs for such care. Individual medical insurance plans do not cover these costs. You must purchase a long term care policy. These policies are expensive, even with moderate coverage elected. The younger an individual is, the lower the premium will be. Unfortunately, most individuals do not consider this type of coverage until they are ill or elderly. At that point, the premium for this type of coverage will be cost prohibitive.
In order to qualify for Medicaid benefits and protect a client’s assets, estate planners are able to guide their clients through Medicaid planning. If done early enough, the planner can effectuate the transfer of most, if not all, of the client’s assets into an irrevocable trust. After a five year period has elapsed from the date that the assets were transferred into the trust, the assets are exempt from Medicaid eligibility. This planning process will qualify the client for Medicaid benefits, preserve the client’s assets in trust for the client’s benefit and allows the trustee to supplement the client’s care. This type of planning can be very successful if attended to timely.
Other lifetime planning can be used to protect your assets. Any business or investment property owned by a client should be placed into an LLC, S-Corp or limited liability partnership. These entities provide the client with limited liability and afford the client with the advantageous pass-through tax benefits. Therefore, if the client’s rental property is owned in an LLC, and someone is injured on the property, sues and obtains a judgment, the judgment can only attach to the assets held in the LLC. The judgment will not be enforced against the client’s individual assets. It is recommended that multiple investment assets be held in separate entities. This structure will prevent cross-liability against the other investment assets.
AnnMarie P. Smits is a Partner at WJ&L and serves as the Chairperson of the Tax,Trusts and Estates Department.