Protecting Assets from Creditors?

Estate planning is not just about saving taxes, it is also about managing and protecting your assets against future creditors, both for you and for your beneficiaries.

litigationForbes’ recent article entitled “Three Estate Planning Techniques That Protect Your Assets From Creditors” explains that the key to knowing if your assets might be susceptible to attachment in litigation is the fraudulent transfer laws. These laws make a transfer void, if there’s explicit or constructive fraud during the transfer. Explicit fraud is when you know that it is likely an existing creditor will try to collect from your assets. Constructive fraud is when you transfer an asset, without receiving reasonably equivalent consideration. Since these laws may void the transfer, a future creditor can be able to attach your assets.

Transferring assets for reasonably equivalent consideration will eliminate the transfer being treated as constructive fraud. Reasonably equivalent consideration includes:

  • Funding a protective trust at death to provide for your spouse or children
  • Asset transfer in return for interest in an LLC or LLP; or
  • A transfer that purchases an annuity (or other interest) that protects the principal from claims of creditors.

Limited Liability Companies (LLCs) can also be an asset protection entity, because when assets are transferred into the LLC, your creditors have limited rights to get their hands on them. Your interest in the LLC can not be easily be attached, and it is hard for creditors to receive anything from an LLC interest.  An LLC must be treated as a business for the courts to treat them as a business. Thus, if you use the LLC as if it were your personal property, courts may disregard the LLC and treat it as personal property.

Annuities are created when you exchange assets for the right to get payment over time. Unlike annuities sold by insurance companies, these annuities are private. These annuities are similar to insurance company annuities, in that they have some income tax consequences, but protect the principal against attachment.

You can also ask an experienced estate planning attorney about trusts that use annuities, which are called split interest trusts. There is a trust where you (the Grantor) give assets but keep the right to receive payments, which can be a fixed amount annually with a Grantor Retained Annuity Trust (or GRAT.)

Another trust allows you to get a variable amount, based on the value of the assets in the trust each year. This is a Grantor Retained Uni-Trust or GRUT. If the assets are vacant land or other tangible property, or being gifted to someone who’s not your sibling, parent, child, or other descendant, you can keep the income from the assets by using a Grantor Retained Income Trust (or GRIT).

Along with a trust where you make a gift to an individual, you can protect the trust assets and get a charitable deduction, if you make a gift to charity through trusts. There are two types of trust for this purpose: a Charitable Remainder Trust (CRT) lets you keep an annuity or a variable payment annually, with the remainder of the trust assets going to charity at the end of the term; and a Charitable Lead Trust (CLT) where you give a fixed of variable annuity to charity for a term and the remainder either back to you or to others.

To get the most from your asset protection, work with an experienced estate planning attorney

Reference: Forbes (June 25, 2020) “Three Estate Planning Techniques That Protect Your Assets From Creditors”

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