Financial and legal planners have engaged in asset protection planning for many years. Now it is more often called “wealth preservation.” For example, planners have routinely advised clients to use the corporate form of business to take advantage of that form’s limited liability for owners. Asset protection planners have several tools that they may use to protect their client’s assets and, simultaneously, achieve the client’s estate planning objectives. The key to the planner’s success is in fully understanding the key characteristics of different asset protection tools including such tool’s limitations and possibilities, and in fully understanding key strategies that can be used in conjunction with various asset protection tools.
Fraudulent Transfer One of the first things that the planner must examine as part of the proposed asset protection plan is whether any part of the plan will constitute a fraudulent transfer. If any part of the asset protection plan does constitute a fraudulent transfer, the client’s creditors may reach the transferred property. Consequently, the plan will not protect such assets. The “fraud” here does not imply any dishonesty or other bad act. What constitutes a fraudulent transfer involves a complex analysis of facts and law. Before planning, a complete picture of your financial situation is required.
Business Entities A client’s sole proprietorship business operation merits special attention because it may generate liabilities that impact both the business operation plus other of the client’s assets. This is also true of real estate with hazards, including raw land with forest, old operations (such as a lumber mill or quarry), or with buildings, currently occupied or vacant. In contrast, there are other assets, such as furniture, stocks and bonds, certificates of deposit, life insurance policies, that generally do not generate liabilities. Because of this characteristic, the planner must give special attention to the choice of entity that the client uses for his or her business operations and other liability-creating assets. Thus, the planner’s primary objectives will be (1) to limit the reach of liabilities arising out of the business operation, and (2) to protect the assets of the business operation from the reach of the client’s nonbusiness creditors. There are asset protection aspects of (1) limited partnerships, including family limited partnerships, (2) limited liability partnerships, (3) limited liability companies, and (4) corporations. The planner, when evaluating choice of entity, must also consider the associated tax consequences of different entity forms. More specifically, the planner must balance any limited liability benefits of a particular entity form against the tax consequences that flow from choosing that particular entity form.
Trusts Trusts are not business entities, so we treat them separately. Not only may trusts provide asset protection in their own right, they frequently may be used to complement other asset protection tools, and of course complement regular estate planning methods. For example, a client may incorporate a business to limit the reach of business liabilities to assets of the business and then place the corporate stock into a trust to protect the business from the owner’s other potential creditors. There are revocable trusts and irrevocable trusts; revocable trusts have no specific asset protection qualities for the grantor, but do for beneficiaries. Generally, the principal use of trusts for a grantor is to give assets to loved ones while solvent. Among trusts with useful asset protection are: discretionary trusts, support trusts, Miller Trusts (Medicaid), QTIP trusts, QPR Trusts for beneficiaries, and charitable remainder trusts. There are special types of trusts designed substantially for a grantor’s own benefit, namely US self-settled trusts (formed under the laws of Delaware or Alaska, for example) and offshore asset protection trusts. These are trusts that the client establishes in jurisdictions that have enacted laws that protect trust assets to a greater extent than other law does.
Marital Property Ownership The planner may also use certain forms of marital or other joint ownership as part of the asset protection plan. These include (for Texas, California and five other states) the transformation of community property into separate property, and for the non-community property states, the use of tenancies by the entirety and joint tenancies.
Exempt Property Each state, as well as the federal government, both inside and outside the Bankruptcy Code, exempts certain categories of property from the reach of creditors. These exemptions represent a legislative judgment that the benefits of preserving exempt property for the debtor exceed the costs of not allowing creditors to reach such property to satisfy valid debts. These exemptions are valuable tools for the asset protection planner who may protect a substantial portion of client wealth by moving such wealth into exempt assets. This is especially true for Texas residents, and then for Florida and California residents. Specifically, these do in Texas and may in other states include the homestead exemption, the life insurance and annuity exemption, the federal ERISA qualified retirement plan exemption, and the IRA exemption. Be aware that enhancing the amount of exempt property may constitute a fraudulent transfer. By changes made to the bankruptcy law in 2005, the full homestead exemption of Texas law will not be available in a bankruptcy case to a resident of less than 2 and one-half years.