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Asset Protection
Protect Assets Before It's Too Late
Estate Planner Sept-Oct 1997
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You may think of estate planning as a way to pass on assets to your beneficiaries at the least possible tax cost. But you can't pass on assets to your heirs that have gone to creditors, so asset protection planning during your lifetime is critical, especially if you are a general partner or face some other high risk of potential liability. Whatever asset protection method you choose, you must implement it before the claim exists. Otherwise, the assets may not be protected by a court.

Give Assets Away

One of the easiest ways to protect assets from future creditors is to make outright gifts. If you don't own it, creditors can't take it from you. By making $10,000 annual exclusion gifts, you can pass on assets gift and estate tax free. Making outright gifts has drawbacks, however, including loss of income and gains from the property, loss of control over the property and potential gift tax consequences.

Create an Asset Protection Trust

Another option is to make gifts to an irrevocable trust, sometimes called an "asset protection trust" (APT). Generally you cannot be a beneficiary of the APT, you will be required to forgo income from the asset and, without special planning, the gifts may incur gift taxes. You can, however, retain indirect control by carefully choosing the trustee.

Create a Foreign Trust

Foreign trusts, sometimes called "offshore trusts," can offer creditor protection and, in some circumstances, tax advantages. A foreign trust is situated in, and has at least one trustee who is a resident of, a country other than the United States or its territories. The laws of the foreign jurisdiction will control the trust, which may deter litigation and provide more favorable creditor protection or trust legislation. You may even be able to remain a beneficiary of the trust as well. Foreign trusts, however, may be more expensive to create and administer.

Create an Asset Protection Plan Today

These are only a few of the planning techniques that you can use to protect assets. Weigh the advantages and disadvantages of each to choose the best strategy for your situation. Most important, create your plan before any creditor problems exist. Waiting until after liability has arisen increases the risk that the plan will be set aside.

An APT Can Also Protect Assets From the Beneficiaries' Creditors

An asset protection trust (APT) not only protects assets from the donor's creditors, but from the beneficiary's creditors as well. For an APT to provide the greatest protection, the trust agreement should provide that the trust income or principal will only be distributed at the trustee's discretion. A beneficiary's creditor generally cannot compel the trustee to make a distribution. The trust agreement should also include a spendthrift provision that forbids a beneficiary from assigning, transferring or otherwise disposing of his or her interest in the trust and that prevents a creditor from seizing, attaching or garnishing the trust.

Including a beneficiary's spouse as a permissible recipient of trust income or principal may make an APT more flexible, provided that the spouse is not subject to creditor claims. If the beneficiary has creditor problems at the time a distribution of trust funds is needed, the trustee can distribute to the spouse instead. This allows the married couple access to the trust funds but keeps the funds out of the hands of the beneficiary's creditors.
Another approach is to give the trustee authority to use trust funds to make purchases for the beneficiary's use. For example, rather than distributing funds to a beneficiary for the purchase of a home, the trustee can purchase a home with trust assets and then make the home available for the beneficiary's use. This way, the beneficiary does not receive a distribution that can be reached by creditors, and the home will be retained by the trust for future beneficiaries.