Asset Protection Planning

You’ve worked hard, saved, and invested to help build up your net worth.  But to help secure a comfortable retirement for yourself – and a nice inheritance for your heirs – you may want to consider protecting your assets from threats.

Insurance Alone May Not Be Enough
Insurance such as homeowners, auto, medical, and life can provide financial protection from certain risks, but insurance alone may not be enough.  Your assets may also be at risk from lawsuits or creditor issues.  Protecting your assets may make it more difficult for creditors to seize them if you lose a lawsuit or are forced into bankruptcy.

And while some umbrella insurance policies may provide protection from lawsuits, they generally have limits on the type of risks and amount of coverage they provide.

Legal rules related to asset protection vary by state.  Consult with a local attorney to determine the asset protection laws for your state.

The Importance of Planning Early
In most states, it’s too late to protect your assets after you’ve been sued or filed for bankruptcy protection.  And if you transfer assets when you are already having issued with creditors or you know of a possible lawsuit, most states would consider it defrauding your creditors, which can lead to even more problems.  Therefore, it’s vital to protect your assets before a lawsuit exists.

Some Assets May Already Be Protected
State laws may provide some protection from creditors for certain assets, such as:

• Your personal residence
• Property owned with your spouse
• Life Insurance (subject to limitations)
• Certain Annuities (subject to limitations)

These rules vary widely and amounts protected may be limited; check with a local attorney for rules in your state.

Federal laws may provide some protection in bankruptcy from creditors for other assets including:

• Qualified retirement plans such as:
  • Pension plans
  • Profit-sharing plans
  • 401(k) plans
  • Simplified Employee Pension (SEP) plans and Savings Incentive Match Plan for Employees (SIMPLEs)
  • Limited protection for traditional IRAs and Roth IRAs
    • $1,171,650 in 2012 (not counting amounts attributable to rollover contributions)
    • Special rules apply to amounts rolled over to IRAs

Keep in mind, federal exemptions generally apply in bankruptcy proceedings but may not apply for other types of creditor proceedings.

Consult with a local attorney who has expertise in creditor/debtor laws and asset protection laws in your state.

Using a Trust May Provide Personal Protection
Trusts are subject to state laws, and a trust available in one state may not be recognized in another state.  However, these common trust types may help to protect assets, depending on the state laws:

• Spendthrift trusts generally protect trust assets from creditors of the beneficiaries of the trust.
• Irrevocable trusts may provide you with some asset protection.  However, assets gifted to an irrevocable trust generally are for the benefit of the trust’s beneficiaries and you no longer have access to them.  These assets may be subject to gift tax but might not be taxed in your estate if established properly.
• Domestic asset protection trusts are irrevocable trusts designed to benefit the person who established the trust and to protect assets in the trust from the individual’s creditors.  They may not be recognized in other states, and they may be subject to estate tax.  Domestic asset protection trusts are complex and raise issues that must be addressed by a competent attorney.
• Revocable living trusts – these trusts typically do not provide any asset protection.  They’re established during your lifetime, and you can control all assets in them.

Consult with a local attorney if you are considering using a trust for asset protection.

Certain Business Structures May Provide Protection
For business owners, its important to separate personal assets from business assets.  Certain business entities may provide protection so that the owner is generally not liable for the debts or acts of the company.  Though taxed differently, there are several business entities to consider.

• C corporation
• S corporation
• Limited liability corporation (LLC)
• Limited liability partnership (LLP)

State laws apply to these entities as well; your local attorney can assist you with your questions.

Check With Your Team of Professionals
Because asset protection planning is a complex subject that varies by state and is sometimes subject to federal law, it’s important to work with professionals who may advise you on which strategies might work best.

Consult with a local attorney with expertise in debtor/creditor and bankruptcy laws, conflict of law issues, and retirement and estate planning.  And work with your financial professional to determine which products and retirement strategies make send for you.

The sooner you begin planning, the better prepared you’ll be to protect your assets in the future for your retirement and for the next generation.

 

DISCLOSURE
This page is designed to provide general information on the subjects covered. Pursuant to IRS Circular 230, it is not, however, intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market, or recommend any tax plan or arrangement. Please note that American Brokerage Services, its affiliated companies, and their representatives and employees do not give legal or tax advice. You are encouraged to consult your tax advisor or attorney.