By: Investor Solutions
Many people visit an attorney to review their estate plan to ensure assets are distributed according to their wishes. However, far fewer people visit an attorney for asset protection planning. In a litigious society such as ours, this could be a grave oversight not only for the very wealthy but also for those who slave day in and day out to secure a comfortable lifestyle. Lawsuits aren’t just for the doctor who left a scalpel inside a patient during surgery; it’s for the regular Joe next door whose teenaged son just got into a car accident while texting his girlfriend.
So how do we protect our assets from gold diggers? The techniques available to us can range from the rather simple and inexpensive to the more complicated and costly. Here are some examples:
Tenants by the Entirety is a legal form of ownership between husband and wife whereby the individual spouses own an undivided interest in the property. Included in this ownership interest is the right of survivorship. Upon the death of the first spouse, the surviving spouse inherits full ownership of the property. In this type of relationship, the creditors of one spouse cannot attach and sell the interest of that spouse. Only creditors of both spouses can.
ERISA Qualified Pension Plans are those employee benefit pension plans in private industry with minimum standards established under the Employee Retirement Income Security Act of 1974 and Section 401(a) of the Internal Revenue Code of 1986. These plans include defined benefit plans, 401(k) plans, 403(b) plans, employee stock ownership plans, and profit-sharing plans. Under Federal law, these types of plans are out of the reach of creditors. They can, however, be attached for purposes of spousal support, child support and to pay Uncle Sam.
Self Employed Retirement Plans, IRAs and annuities are governed by individual state law as to whether or not they are exempt from creditors. In Florida, for example, Chapter 222 of the statues states that retirement accounts including but not limited to IRAs, SEPs, and SIMPLE IRAs are exempt.
Homestead Exemption protects the homeowners from the forced sale of their residence to satisfy the claims of creditors. In many states, the homestead exemption is automatic, but in others such an exemption must be requested and the home is not protected from creditors until it is approved. The individual states establish the rules for homestead exemption in terms of the value of the property. In Texas, for example, the homestead exemption has no dollar limit. It is, however, limited to 10 acres if it is an urban dwelling and 100 acres if rural. The rural allotment is doubled for families.
Life Insurance works like the retirement plans mentioned above in that it is governed by the states. Florida Statutes, Chapter 222, also provides that the cash value of life insurance and the death benefits of a life insurance policy are exempt from creditors’ claims.
Irrevocable Trusts are those in which the trustor gives up complete control over and access to the trust assets. In doing so, the trustor relinquishes ownership interest in those assets and thus, removes them from the reach of creditors. There are many types of irrevocable trusts that are useful for asset protection. These include:
- Spendthrift trusts
- Discretionary trusts
- Support trusts
- Personal trusts
- Self settled trusts
- Asset protection trusts
LLCs and Corporations are two types of business structures that provide limited liability to all owners of the business in every state. The owner’s liability is limited to what he or she invested in the business.
I am not claiming to be an attorney so it is extremely important to consult with qualified counsel to ensure that your assets are properly titled and that additional planning vehicles are in place, if appropriate. It is also important to discuss with your attorney how these vehicles affect your overall estate plan as they can sometimes be at odds.
For additional information please see “Keeping What You Have: An Overview of Asset Protection Planning” by Frank Armstrong, III, CLU, CFP®, AIFA®. Click here to view.