Q: “Asset Protection”- Are they dirty words?
A: Rarely in the world of Trusts & Estates do you hear the words “Asset Protection” from long standing & established estate planners and attorneys. Why is that? For many years asset protection had been touted as a means to avoid responsibility; to dodge lien holders, creditors and tax liabilities.
Asset Protection was often associated with off shore bank accounts where people (perhaps unscrupulous) were able to hide their money. Asset Protection also included the creation of shell companies and partnerships so diluted it would frustrate creditors.
The problem with the term Asset Protection is that its reputation has too often thwarted what would otherwise be considered good estate planning. Even today, if you search the internet for “Asset Protection”, you will be flooded with a litany of websites offering asset protection methods that are not only borderline illegal, but completely ineffective.
The good news is that there are many “asset protection” devices and methods which are effective and used in most estate plans. These methods have been around for generations. We just don’t call it “Asset Protection”. However, they are very legal, very responsible ways to plan your estate through time tested methods accepted by State and Federal laws and taxing authorities. These methods can focus on protecting business assets or personal wealth for generations.
From an operational standpoint, incorporating your business or forming a Limited Liability Company are two of the best methods to protect your personal assets from being exposed to the liabilities of your business. Anyone who owns their own business will tell you that you shouldn’t have your house exposed to liability from an unfortunate business downturn or a negligent act of an employee. Both methods are very effective. The formation of an LLC is cost efficient and very effective and should be a standard among small business owners or sole proprietors.
Another issue which is of great concern for most of my clients is the preservation and protection of current assets for future family generations. Most of my older clients are concerned about their ability to assist their children and grandchildren financially. This usually involves two issues; 1) growing the assets for future wealth, and 2) protecting/preserving the assets for future generations.
A further, but no less concerning, issue for those who desire wealth preservation is the spend thrift personalities of their younger family members. Older generations are often concerned with members of the younger generation handling family assets in a “less than conservative” manner and exposing family wealth to creditors.
Quality estate planning provides for a litany of methods to address the personal wealth concerns of most clients. Gifting laws and gift tax exemptions are, of course, methods which provide for the annual and lifetime distribution of assets to family members, thereby preserving wealth. Irrevocable Trusts which provide for the transfer of assets to other family members will relieve the Grantor of ownership and control of assets thereby removing them from the reach of future unknown liabilities. Family Limited Partnerships can create new ownership rights of family owned property thereby limiting exposure to certain assets.
Revocable Spendthrift Trusts are a surefire way of preserving assets distributed to a minor, or “less Conservative” family member by keeping the assets unexposed to that person’s creditors.
The world of “Asset Protection” can be slippery slope. Despite the availability of time tested methods of preventing exposure of your assets to the unexpected, there are people out there continuing to create new untested and often unorthodox methods to avoid creditors. Beware of any new method that has not been tested and survived the IRS and State & Federal laws. Always consult your estate planning attorney before starting any method intended to protect your estate. As history has proven, if it seems too good to be true, run, don’t walk, from it.
Anthony J. Medico, Esq., has practiced law for over 15 years. To ask a question for this column, or to receive Medico’s free Estate Planning Survival Guide, visit his website at www.ajmedico.com, send an e-mail to Anthony@ajmedico.com or call (203) 661-8151. You can read most of his previous columns on his Greenwich Time estate planning blog on the internet. Just go to http://www.greenwichtime.com/blogs and scroll down until you find him under the business section. Enjoy.
The Law Offices of Anthony J. Medico
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