Estate planning involves more than trying to reduce or eliminate estate taxes upon your death. If you do not protect your assets from the claims of creditors during your lifetime, you could end up having no estate left to plan. There are certain steps that you can take right now to better insulate your assets from creditors and lawsuits.
Asset protection is largely misunderstood—it is not about avoiding responsibility and accountability for legitimately incurred debts. Rather, it is a process by which you can work to avoid assets being tied up in lawsuits and maintain better control over your assets before a debt is incurred or before a claim is foreseeable. Once a potential debt or obligation is foreseeable, it is typically too late to take any steps to insulate assets—any such action taken at that point is typically a “fraudulent conveyance” that a court can later unwind. Thus, it is important to engage in asset protection planning before a potential liability becomes evident.
The most fundamental form of asset protection is liability insurance—both personal and professional. Having the proper insurance helps to reduce the risk that personal and professional assets are ever reached by a lawsuit.
Titling a residential property jointly is another simple way of providing asset protection if you are married. Holding property in this manner insulates the property from creditors of only one of you. The only way that the property can be successfully attacked is when there is a claim against both owners. Therefore, if one of you or your spouse is a doctor or other high-risk professional, the re-titling of real estate can provide protection.
Gifting assets to family members (or to one or more trusts for their benefit) is another excellent way to protect assets. Of course, when you gift the assets, you generally lose (i) control over them, and (ii) the ability to use them. Certain trusts can be structured, however, to retain some degree of control over the assets while still providing the desired asset protection.
The above gifts, however, involve giving up the asset itself. There are now certain states that permit domestic asset protection trusts. These are trusts that you can create for your own benefit, by transferring the asset to an independent trustee, and retaining the right to be a discretionary beneficiary of the trust. Although you do not have unrestricted access to the trust property, you are still eligible to receive distributions from the trust. It should be noted that domestic asset protection trusts have not yet been tested in many U.S. courts, so their efficacy is still uncertain.
Offshore trusts can also be established in certain jurisdictions—and generally provide excellent protection. These trusts are not for everyone since they are often complicated and expensive to set up and maintain.
Qualified retirement plans (i.e. 401(k) and 403(b) plans, are excellent places to protect assets. In most cases, these plans are entirely exempt from creditor claims until the benefits are distributed to you. Individual retirement accounts (IRAs) and other non-qualified plans often offer more limited credit protection.
Another way to protect your assets from creditors is by forming a family LLC or family Partnership. You contribute assets to the entity in exchange for interests in the entity. If a creditor successfully attacks such an asset, creditors can only obtain the right to receive distributions from the entity when they are paid out—which is in the sole discretion of a general partner. This makes the assets unattractive for creditors to pursue. Family LLCs and family partnerships can also be structured to provide significant estate tax savings to you and your family.
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The above is just a general introduction to some of the asset protection strategies that you can employ. Of course, any asset protection plan that you put in place should be tailored to suit your unique circumstances. In future blogs, I will discuss other estate planning techniques that are appropriate for real estate owners.
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Naim Bulbulia, is the head of Hartmann Doherty’s Trusts & Estates practice. Before joining the firm, he practiced in New York City, at Dewey Ballantine, LLP and Bingham McCutchen, LLC; and most recently, at Skoloff & Wolfe, P.C. in Livingston, New Jersey. Naim is a graduate of Harvard Law School and is licensed to practice in both New York and New Jersey. Naim was recently named a New Jersey SuperLawyers Rising Star in the area of Trusts & Estates. Naim lives in Short Hills, New Jersey with his wife and three children.
This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer.