Asset Protection versus Estate Planning

Posted on November 2, 2011

Many people have questions about the asset protection features of estate planning.  I want to clear up a few misconceptions.  First, the ideas of asset protection and estate planning are quite distinct.  Estate planning is driven by the need and desire to pass on assets after death.  The intricacies of estate planning are designed to make sure that one’s wishes are carried out to the letter, and in the best cases without the involvement of a judge or probate court.

Asset protection planning, on the other hand, is designed to protect assets from creditors while you’re alive.  The purpose of asset protection is to guard against two distinct types of liabilities.  You want to protect your assets from claims against you personally, and you want to protect yourself (and the bulk of your assets) from liabilities caused by any risky assets that you might own.

An Unlikely Intersection

The traditional tools of asset protection involve the use of limited liability companies, corporations, and partnerships.  Many times these tools are used in complex ways to ensure that creditors can’t “hack into” an asset protection plan to satisfy claims against the individual owners.  In its own right, asset protection requires careful attention to detail. If the details aren’t right then the plan could fall apart, in which case it is worthless.

Estate planning, on the other hand, has traditionally made use of two tools: The last will and testament and the trust.  A trust is an instrument that separates the concepts of beneficial use and legal ownership.  The trustee of a trust—the person charged with administering the trust and the legal owner of trust assets—uses the assets to benefit certain individuals called beneficiaries.  Some trusts have a very particular feature called spendthrift provisions.  A spendthrift provision simply places assets of the trust beyond the reach of creditors of the beneficiaries.

If you haven’t noticed, in some circumstances trusts can be used to protect assets!  It is the spendthrift provision—a very old, tried and true legal mechanism that makes this possible.  Here’s the rub.  In order for spendthrift provisions to work, beneficiaries cannot have any say over the management of the trust, nor can they manage or direct trust assets or change the terms of the trust in any manner whatsoever.

A revocable living trust cannot incorporate a spendthrift provision.  I point this out here because it is a question that is often asked.  In effect, if you wish to create a trust to protect your assets against creditors, it requires that you be willing to transfer those assets to a trust that truly only benefits your heirs, or engage in some asset protection planning. Either way, I can help you.

I Could Go On

The information I could include here on different types of trusts and asset protection mechanisms could fill volumes, but it would simply be better (and certainly more personalized) if you called my office to set an appointment so that I could answer your specific questions and tailor a plan that fits your unique circumstances.  The first two people who call my office and mention this blog post by name will receive a free Family Wealth Planning Session™ (normally priced at $750), so hurry.  I would like to be able to get you on the calendar as soon as possible as I only take a limited number of new clients each month.

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