Asset Protection with Estate Planning

By | September 20, 2010

What’s the single hottest topic in California estate planning?  Here in Sacramento foreclosures are a popular topic but not so much for people with assets.  Estate tax law changes are always in vogue for people with money.  However, the number one hottest topic, the numero uno point of concern, the biggest area of questions is in the area of asset protection.  The questions start like this, “I have some assets and no immediate threat of a lawsuit but I want to protect my assets.  What can I do?”  I am NOT an “asset protection” attorney if you are in trouble like OJ Simpson was back in ‘94.  He probably moved most of his assets to some lawless island nation because the risk of moving his assets to said lawless island nation was less risky than Mr. Goldman tracking those assets down.  In fact, Mr. Goldman is probably still going island to island searching for OJ’s assets and probably eventually will find a way to crack the laws of that lawless island nation.  If you are in a predicament like OJ do NOT call me.  However, if you are a regular person, with some assets, and you wish to minimize your exposure to liability risks please do call me because there are things we can do for you.  Today I am going to talk about a couple of very popular and simple things that can be done.

The easiest estate planning tool, that provides some asset protection, is a Qualified Personal Residence Trust.  This is also known as a “QPRT” which is pronounced Q-pert.  A QPRT is an irrevocable trust.  This means you effectively have GIVEN AWAY the assets put into the trust upon creating the trust.  As the name indicates a QPRT is usually funded with a… personal residence.  It actually can be created with multiple personal residences so for you people with a house at Lake Tahoe or a home at Sea Ranch you can do a couple QPRTs.  How does a QPRT work?  Well, a QPRT is simple a reservation of a life estate in your house with the remainder going to your kids (or other chosen beneficiary).  There can be substantial estate tax reduction by use of a QPRT.  Many people are concerned about giving away property but with a QPRT you retain the right to live in the house, the right to switch houses, the right to an income stream if you sell the house and don’t buy a replacement, and in general many of the rights of ownership. However, it is generally going to be protected from claims of your creditors!  If you want to hear about the mechanics of a QPRT send me an email and we can talk more about it to see if it would be appropriate for you.

A second popular estate planning tool which gives some asset protection is a Family Limited Partnership.  These are also known as “FLP’s” or “FLiP’s.”   We actually use LLC’s now days but they have kept the LP moniker.  Either way you are setting up a business entity, akin to a corporation, to shield assets from creditors.  You then, with the aid of a knowledgeable attorney, break off small interests which go to your kids (or other chosen beneficiaries).  I often recommend putting the kid’s shares into an irrevocable trust to give them additional asset protection.  There can be substantial estate tax savings by the use of an FLP.   This tool is not right for everybody but if you own rental properties, commercial real estate, a business, a farm, and certain other assets an FLP can be an incredible estate planning device to use.

A third popular way to plan your estate, while creating asset protection, is by use of a life insurance trust for your spouse.  That is, you set up an irrevocable life insurance trust (“ILIT”) for the benefit of your spouse and children (or other chosen beneficiaries).  If it’s set up right you get around any issues related to the community property nature of your premium payments and can set up large sums of money to pass with very strong asset protection for your spouse.  That is, your creditors and those of your spouse would have a very difficult time knocking down an ILIT to get at the money sitting inside it.  As with the above devices using a knowledgeable and experienced attorney is crucial here!

All of the above are useful tools to help bolster your personal empire.  They are NOT impervious walls.  Rather each device you put up in another obstacle that a potential creditor must get around.  The number one key with “asset protection” is to do it early and hopefully before any creditors are even on the horizon!  I would love to talk about the above plus other things you can do… or maybe already are doing (pension and 401ks are often given almost impervious protection).

John B. Palley is a partner with the Law Offices of Meissner, Joseph & Palley, Inc.  Mr. Palley is a Certified Specialist in Estate Planning, Trust & Probate Law as determined by the State Bar of California Board of Legal Specialization.  He also has received the prestigious “AV” rating by Martindale Hubbell.  Mr. Palley also is a past Sacramento Bee estate planning and probate “expert”  and is also a member of the LawGuru Attorney Network.

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