Asset Protection

Asset protection is an integral part of estate planning. There are many advantages to developing a comprehensive estate plan while you are in good health and before any diagnosis of a serious health condition. The estate planning stage is an also an appropriate time to consider any risks associated with your occupation or other circumstances.

For example, you might be at risk for liabilities arising out of your business activities or risks associated with children who drive or engage in similar activities. There are many methods by which individuals can shield assets from debt collection. Here are a few ideas:

Retirement plans

Consider funding a retirement account. Certain retirement plans are protected under federal and state laws, including exemption and protection in bankruptcy.

Asset protection trusts

An irrevocable income-only trust is designed for senior citizens for use in states whose laws recognize the validity of self-settled, income-only trusts and generally protect the trust principal from the claims of creditors. There are also important Medicaid consequences of irrevocable income-only trust asset protection. Consult an attorney familiar with this complex area of law to determine if an irrevocable trust should be part of your estate plan. Revocable trusts can also be drafted so that assets are left to beneficiaries in a manner designed to provide protection from creditors.

Tenants by the entirety

Married couples living in Hawai’i can hold property as “Tenants by the Entirety.” Creditors generally cannot reach this property unless both spouses are found liable. This can be very effective protection if, for example, liability arises out of your business and your spouse is not involved in that business.

Buy insurance

One of the most effective protections for your assets is to buy insurance that covers potential liability. Car insurance is a common example. A provision can often be added to a homeowner’s policy to cover liability arising out of home ownership. Potential liability arising from your business activities should be evaluated, and insurance should be sufficient to protect your assets. Enlist your insurance agent’s help when performing this evaluation. 

Create an entity

Another alternative to consider as you create the plan to protect your assets is to create a business entity that segregates your assets. Limited partnerships, limited liability companies and corporations are often used to limit the assets available to creditors to those assets within the entity. Thus, the credit of a corporation will generally be limited to the assets within the corporation. Assets held personally or in another entity are protected from the corporate creditor. An entity can also serve to consolidate assets and transfer substantial interest to heirs.

Aggressive alternatives

Creating an offshore trust can be expensive and risky. However, a creditor might be discouraged from pursuing assets in an offshore trust simply because it is more difficult and time-consuming. (It should be noted that the Internal Revenue Service has shown no reluctance to pursue offshore assets.) Certain states including Alaska, Nevada, Delaware and Rhode Island provide protection for assets contained in trusts created in those states. There are some cautions, however. The assets must be located in the respective state and held by a trustee other than you. It’s also unclear that a trust located in one of these states is effective for a non-resident.

• Karen Baldwin is an attorney. You can contact her at 826-7888 or email kbaldwinattny@hotmail.com.