- Your ex-spouse or your child’s soon to be ex;
- Lawsuit-hungry trial attorneys;
- Disgruntled or estranged family members;
- Nursing homes;
- Unexpected car accident; or
- God forbid, if you or a beneficiary needs to file bankruptcy.
Definition Of Asset Protection
Asset protection is when you put your assets in a trust or use other legal means to shield them from creditors. You might do this to prevent your assets from being seized if you’re sued or taken by creditors. And there are several ways you can protect your assets this way.
Asset protection refers to the use of various legal mechanisms to protect money from creditors and lawsuits. It can also be used to prevent the assets from being used in an unwise manner, though that requires careful planning to achieve.
Asset protection does not mean that you’re hiding assets from tax collectors or doing something else wrong. There are many legitimate reasons why you would want to take advantage of the myriad asset protection options available.
Reasons To Take Advantage Of Asset Protection
Asset protection may shield assets from lawsuits. And we need to realize how many people are the targets for lawsuits simply because of the assets they hold. For example, landlords are at risk of being sued for 100K by someone who trips on a sidewalk and decides to try to win the de facto lottery. Wealthy individuals and business owners may be sued for millions if there is a legitimate minor claim, just as there are seminars on how to sue Walmart. Putting real estate investment properties in a trust will protect your personal assets from creditors, if you lose the lawsuit. Then you don’t risk losing your own home because someone drowned in an apartment building swimming pool.
Asset protection can protect the assets from irresponsible behavior by the recipient. For example, trusts often predicate access to the money on reaching various milestones. It is common for trustees to be authorized to pay for someone’s educational expenses but not give them a lump sum until they graduate college. This ensures that they can’t blow the money on trips and partying. Or the trust may prevent them from accessing the money until they’ve become accustomed to living independently. For example, the trust may not pay them anything until they are 25 or 30. Now they have had to get a job and start a career instead of living off of the trust fund. This turns the trust into a gift to financially responsible adults instead of enabling financially dependent individuals.
Trusts are sometimes set up to manage money on behalf of those who cannot do so themselves. This is why insurance payouts are typically put in trust for someone who was left disabled by an accident, especially if there is brain damage. Trusts are the default option for managing assets for special needs adults. Their very status as special needs implies they cannot manage the money for themselves. You can also use the trust to pay for incidentals and little luxuries like music lessons without endangering their ability to qualify for government benefits.
Arizona state law created the Miller Trust. The Miller Trust allows people who have more assets or income than what lets you qualify for Medicaid nursing home care to take advantage of the program. It will not let you use tax-payer funded long term care if you’re wealthy. The trust will receive income above the threshold for qualifying for Medicaid. That money will eventually go to the state of Arizona to reimburse it for your care. But you can set up a Miller trust so that a couple can take advantage of Medicaid nursing home care. Consult with an Arizona attorney to understand how you can protect the retirement assets of a healthy spouse when another is going to need long-term care. This type of trust may allow you to afford long-term care without leaving the surviving partner with nothing.
Trusts are a viable way to prevent someone from blowing through their inheritance or retirement assets. For example, a trust that pays the bills and issues an allowance to the recipient prevents them from giving it all away when they’re high on drugs or when a bipolar person is in their manic phase.
The trusts provide asset protection from scammers, too. If the money is in a trust on behalf of an elderly spouse whose mind is failing, they can’t give it all away to various charities and end up with nothing to live on. Money in a trust managed by a trustee is out of reach of an identity thief.
Trusts can be used to protect assets from poor financial managers. For example, you can set up a trust to dole out money for orthodontics, private school and college tuition for your young grandchildren while preventing their spendthrift parents from ever touching it. Now you don’t have to worry about financially irresponsible adults from spending money intended to be used to the benefit of the next generation.
Trusts can be used to protect an estate from the ravages of probate. Most probate cases don’t result in nasty, expensive legal fights. But a trust can make such a case almost impossible, if it is set up properly. The trustee manages the assets while the estate is being settled, and the property passes to the heirs outside of probate. A properly set up trust will protect you as an individual if you are disabled by an accident, an illness or general deteriorating health. Your business, real estate or stock portfolio will continue to be managed by the trustee for the benefit of you or your family. The trustee can pay the taxes and other bills for you. Depending on the situation, the assets may be protected from creditors, too.
The Most Common Asset Protection Strategies
For business owners, the limited liability corporation or LLC is arguably the best approach. When the business is set up as a limited liability corporation instead of a sole proprietorship or partnership, the liability and the debts remain with the business. Your personal assets are not at risk of the business goes bankrupt or is hit with a ten million dollar lawsuit. Why don’t more people set up LLCs? It is takes more work, and that must be done when you start the business.
If you own significant real estate, then you can either choose an LLC or a trust. An LLC may be the better choice if it is income producing real estate. The LLC pays taxes, and you receive income from it. LLCs are rarely result in double taxation of profits forwarded to the property owner. But it will protect your personal assets from creditors if the apartment complex or construction site is sued when a visitor is hurt on the premises. You can even set up several LLCs to manage several different properties. That’s a good way to manage properties in different states, but it is overkill if you have three rental houses.
A trust can shield personal assets from creditors and lawsuits, if it is a non-revocable trust. This is a good way to protect income producing real estate, especially if you want the income to go to your heirs. If your kids tend to overspend, they won’t be able to sell the house for what seems like a cash windfall. Your widow can’t have the source of her retirement income stolen by title theft. The trustee should be monitoring for changes to the title or new loans taken out against the property’s equity. Special needs trusts are there specifically to manage and protect assets held in trust for a special needs child or adult.
Revocable trusts don’t protect assets from creditors and lawsuits. However, it does allow the money or the assets to be managed by a trustee no matter what happens. This can give you significant freedom. Let the fund manager manage your investment portfolio, whether you want to travel or need to focus on your health. A trustee could manage your business, filing its Arizona income tax return on your behalf. And they can continue to do so if you don’t recover your full faculties after a heart attack.
Annuities and life insurance should be mentioned. Annuities hold money in an account and pay out a specified amount. They may pay X dollars a month or pay a certain amount indexed for inflation. Annuities will pass on to your beneficiaries outside of probate. Annuities may or may not be protected from creditors and garnishment, but this depends on the type of contract. They’re often treated like 401Ks and IRAs, such that the money contributed more than two or three years ago is sheltered from creditors. But you can’t put all of your money in the annuity once you receive the notice that you’re being sued to try to avoid paying the judgement.
Life insurance policies may be term life or whole life. In general, the whole life account’s value is protected from creditors. The payout from life insurance policies passes outside of probate and is generally beyond the reach of creditors. Life insurance policies may be used to provide a lump sum for your surviving relatives to live off of or pay off inheritance taxes. And a life insurance policy could be set up to fund a trust upon your death. Consult with an Arizona estate planner to determine whether or not these investments are right for you.
Only a legal professional can say what the right course of action would be given your particular situation.
Asset protection is a way of setting up your assets so that they can’t be taken or dragged into litigation by someone else.
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Arizona law exempts some property or a portion of the property’s value:
- Homestead – $150,000 of the equity in a homestead is protected.
- Personal items – Many personal items may be exempt, but there are dollar value limits on these items.
- Household goods – Some furniture, electronics, and appliances up to $6,000 may be safe.
- Certain income and judgments – Some benefits, income, proceeds from judgments, and retirements accounts are protected.
Assets that are not exempt by law need their own layer of protection. Some of the strategies you can consider are listed below. But BEWARE: asset protection done wrong can be a state or federal crime (fraud) and can land you in more trouble than it was worth. Take steps carefully and with the guidance of an attorney who knows what they are doing. By using an asset protection attorney to help strategize, you also get the protection of their malpractice insurance.
- Converting non-exempt assets to exempt assets.
- A family limited partnership may protect assets for future generations.
- Irrevocable trusts may protect assets, but there are certain restrictions and limitations.
- Certain business entities can offer protection from liability and creditors.
- Asset protection trusts can separate your assets from a creditor’s reach.
As with most asset protection plans, the end result is not an absolute guarantee of protection but rather a plan that has built another layer (or multiple layers) of protection that make it more and more difficult for anyone to break through.