Creating a solid asset protection plan can safeguard your wealth from lawsuits, creditors, and unexpected life events. However, you can’t realize those benefits if you make dangerous asset protection mistakes. All it takes is a single misstep to expose your savings and jeopardize your family’s inheritance.
To help you shield your wealth, we’ve outlined the most common asset protection pitfalls and how to avoid them:
- Assuming a Living Trust Protects Your Assets
- Ignoring Medicaid Planning
- Not Protecting Your Inheritance for Your Children
- Leaving Assets Directly to Children With Special Needs
- Holding Real Estate in Your Own Name
- Choosing the Wrong Trustee
- Not Working With an Asset Protection Professional
1. Assuming a Living Trust Protects Your Assets
You may have heard that a living trust offers protection from lawsuits. It doesn’t. A revocable living trust is used for estate planning, not asset protection. It can help distribute assets after death, but it will leave your assets exposed to creditors.
How to avoid this pitfall:
- Use an irrevocable trust for asset protection instead of a revocable trust.
- Ensure that your trustee has full control over your assets.
- Appoint an independent trustee to manage your assets, not a close friend or family member.
Reliable methods of asset protection, such as an offshore asset protection trust, meet all of the above criteria. When an irrevocable asset protection trust is established by a qualified professional, like those at Asset Protection Planners, it can shield your wealth and provide estate planning advantages.
2. Ignoring Medicaid Planning
Don’t overlook the ways that long-term care can wipe out your savings. If you require medical treatments as you age, it’s best to have them covered through Medicaid. However, you can only receive Medicaid if you meet certain net worth and income requirements. Failing to meet those requirements can leave you on the hook for the medical bills you accumulate.
Even worse, if you receive medical treatment through Medicaid, the agency can charge you afterwards. Should you be charged, Medicaid can seize all your assets to cover the cost of your treatments. This is true even if you hastily set up a Medicaid trust, as Medicaid has a five-year “look back” period where they can claim trust-held assets.
How to avoid this pitfall:
- Create a Medicaid trust at least five years before you need care.
- Transfer assets into the trust early to avoid the Medicaid “look-back” penalty.
- Include Medicaid trigger clauses that allow your designated trustee to take over planning if you become incapacitated.
3. Not Protecting Your Inheritance for Your Children
Your asset protection plan should include provisions in the event of your death. If you don’t pass down asset protection to your children, they could be sued. Should this happen, all the wealth you worked hard to accumulate and protect could end up in a creditor’s hands before your children have a chance to use it.
Thankfully, you can use spendthrift trusts to keep your assets safe after you die. These trusts dole out your assets in regular intervals to your children, ensuring they have a comfortable life, while protecting the majority of what they are set to inherit.
Here’s an example of how a spendthrift trust could work in practice. Imagine that you’ve created a spendthrift trust for your child. After you die, your child goes through a contentious divorce in which their ex-spouse receives a favorable ruling. Had you left your money in a standard trust or just promised it to them in a will, that inheritance could’ve ended up in the hands of your child’s ex-spouse. Fortunately, your choice to create a spendthrift trust places a majority of their inheritance out of the ex-spouse’s reach. Your child will continue receiving distributions from the trust both during and after the divorce.
A spendthrift trust can even protect against poor financial decisions. Should your child end up making bad investments or fall into debt, your spendthrift trust can help keep them on their feet. If you leave them an inheritance in a lump sum, all that money could be squandered on those same poor investments.
In short, creating a spendthrift trust provides a safety net for your children and avoids several common asset protection pitfalls related to estate planning.
4. Leaving Assets Directly to Children With Special Needs
If you have a child with special needs, you want to ensure they’re financially supported after your passing. However, leaving a large inheritance to a child with special needs can disqualify them from vital government benefits.
You can avoid this asset protection pitfall by setting up a Special Needs Trust (SNT). These trusts put the majority of your wealth outside your child’s ownership and support your child with regular distributions. Most importantly, because the trust owns the assets, that wealth is not included in your child’s net worth. This ensures that your child can still receive the government benefits provided to people with special needs.
5. Holding Real Estate in Your Own Name
Owning property in your name makes you an easy target for lawsuits. Property ownership records are public, and anyone can look up your name to discover your real estate holdings. If you’re not careful, an aggressive lawyer can use these public records to determine if you’re a good target for a lawsuit.
However, you can protect your real estate by placing every property you own into a land trust. By doing this, you put the trust’s name on the deed rather than your own. When a lawyer runs a name search on you, it will appear as though you don’t own real estate. You can even use land trusts for your primary residence without compromising the tax benefits you receive for owning a home, provided the trust is structured correctly.
Tools That Can Make Your Land Trust Stronger
If you choose to create a land trust, keep in mind that it only protects assets by making ownership private. When someone sues you, the assets in your land trust are likely still vulnerable. However, there are two key ways you can enhance a land trust:
- Adding a limited liability company (LLC): LLCs naturally provide some asset protection. Notably, if you are ever sued, the assets owned by your LLC will remain out of a creditor’s reach. You should consider setting up an LLC to own and manage every piece of property you own, with the exception of your primary residence. Owning each property under a distinct LLC will prevent a lawsuit from affecting all of your real estate holdings by limiting the damage to a single property.
- Setting up equity stripping: To totally protect your real estate equity, you can use a technique known as “equity stripping.” This process involves establishing an offshore trust, then having an offshore lender record a mortgage against the property. All the payments you make will go into the offshore trust that you established, which cannot be touched by creditors. At the same time, creditors can’t go after your property, as all its equity belongs to the offshore lender who recorded the mortgage. Once your legal troubles subside, you can coordinate with the offshore lender to eliminate the loan and place the property back under one of your LLCs.
6. Choosing the Wrong Trustee
Many trusts fail because of poor trustee selection. If your trustee is someone close to you, like a family member or employee, courts may consider them your “alter ego.” When courts determine your trustee to be an alter ego, the judge can void the protections of the trust, leaving your assets vulnerable to a creditor.
You can easily avoid this asset protection mistake by appointing a reliable independent trustee or even a corporate trustee. You can locate these reputable trustees by working with an asset protection planner, as they tend to have lists of capable trustees in several jurisdictions. Ideally, you should avoid hunting for a trustee on your own, as the quality of your trustee can make or break an asset protection plan.
7. Not Working With an Asset Protection Professional
Trying to protect your wealth without help from a professional asset protection planner is a dangerous mistake. Asset protection requires you to navigate complex legal structures that are constantly in flux and which vary from jurisdiction to jurisdiction. You could lose everything to a lawsuit or creditor claim if any part of your plan is flawed or improperly executed.
Relying on your own knowledge or that of unqualified advisors puts your net worth at risk.
You also need to watch out for cookie-cutter solutions offered by online “experts.” These hastily assembled tools fall apart fast when scrutinized by a lawyer.
You need a professional who specializes in asset protection, not just estate planning or tax law, to ensure your assets are secure. A qualified asset protection planner will evaluate your financial situation and tailor a strategy to your needs using time-tested tools that work.
Let Us Help You Avoid Common Asset Protection Mistakes
At Asset Protection Planners, we’ve spent decades helping people just like you create strong, court-tested asset protection plans. Whether you’re concerned about lawsuits, long-term care, or protecting your children’s inheritance, we can help you avoid costly asset protection pitfalls.
Get your free consultation today to create a strategy that keeps your wealth safe for generations.
