Asset Protection Pitfalls to Avoid
Activating an asset protection plan can help you avoid legal threats and provide tremendous safety from creditors, actual or potential. While many people think setting up a living trust provides asset protection, many do not realize that whereas it directs where your assets go when you die, it usually provides little to no protection for your wealth when you are alive. This is one of many misperceptions and pitfalls to avoid that we will discuss here.
Pitfall #1: Failing to Protect Assets from Medicaid
One important thing to keep in mind as one day folds into another is that we need to come to grips with our own eventual declining health and ultimate mortality. With aging comes the increased likelihood of health problems and serious illnesses. Furthermore, because this possibility increases, there comes alongside of this the need for long-term care that could drastically increase financial outgo. For instance, the need for any extended care at the hospital may very well clean out one’s savings account. One solution to this potentially devastating financial dilemma is the Medicaid trust.
A Medicaid trust is an irrevocable trust in which you place your assets. Your home, bank accounts, savings, household goods, automobiles, etc. are placed in the trust. You will have an independent third-party trustee. What you have accomplished is you have taken these assets out of your name, personally. If they were in your name, Medicaid could seize and sell them compensate themselves for paying for your long-term care.
Timing is Everything
You will need to place the assets into the trust at least five (5) years before you need care. The five-year look-back period starts the day you place the assets into the trust. If they were placed in the trust a shorter period of time, the assets become vulnerable. So think ahead.
Avoid the pitfall of failing to plan for Medicaid. Make sure to have a trust and to include “Medicaid triggers,” in the trust deed. This is a type of wording is used to introduce Medicaid into your trust to plan for long term care. If included in your trust, the “Medicaid triggers” will allow your designated Trustee to take over Medicaid planning in your trust in case you become disabled.
Having Medicaid clauses in your trust also helps you to protect yourself legally if you have some accident that disables you. As long as you planned for Medicaid by having a proper trust established, you have peace of mind knowing that your money is safe, under your designated trustee, and that you are able receive the proper medical care without wiping out your savings.
Pitfall #2: Forgetting About Asset Protection to Assist Your Children
Perhaps you’ve already established a will or trust, thinking you’ve done what you could to secure your assets for your children and grandchildren well into the future. While this is a great initial step, all a will or trust provides for is passing on your assets when you die. What if one of your children loses a lawsuit and gets a big judgment against himself or herself? Once you die you would not want your money going to your children’s enemies. If your child inherits your assets, marries, and later obtains a divorce, his or her former spouse could wind up grabbing a chunk of the assets that you designated for your child. Or perhaps your child inherits your assets and through a whirlwind of bad decisions, winds up rapidly losing your hard-earned money through poor investment choices, or simple overspending.
To avoid these types of problems, you need to include clauses in your trust that address these issues and more: (1) Will your assets be protected for your heirs after you die? (2) Does the trust control who winds up with your money taking various scenarios into consideration? (3) Does it control how much money you allow to your child to get from the trust up front and in the future? For instance, it is possible to have the trust make payments and/or distribute certain assets over time? This is prudent so that a large chunk of assets do not wind up in your child’s hands all at once. Experience has shown that sudden wealth often gets suddenly squandered. You can avoid these pitfalls for your children or those you designate with the proper provisions written into your trust. These clauses allow you to ensure that you are both providing for those who inherit your assets as well protecting their inheritance from seizure or youthful exuberance.
Pitfall #3: Forgetting to Provide Protection for Children with Special Needs
There are many parents who have substantial assets and children with special needs. When a parent of a special needs child passes, both the tragedy of the death and the overwhelming responsibility of inheritance issues can become challenges for that child. One thing important to remember if you are a parent of a special needs child, is to avoid leaving the inheritance directly to them. Leaving a direct inheritance to a special needs child can result in him or her losing needed government benefits.
One way to avoid this legal pitfall is to create a Special Needs Trust for your child. By establishing this trust correctly with an asset protection professional, you can pick a designated Trustee to be in charge of your child’s inheritance. With a Trustee established properly, you will be able to secure the assets and preserve your child’s government benefits. This combination, when planned correctly, can leave your special needs child with sufficient income and care long after your death.
Pitfall #4: Forgetting Real Estate Protection
If you have real estate, like a house, rental property, second home, ranch or farm in your own name, you have already stumbled into a common pitfall. Without the privacy or protection of land trust or a limited liability company (LLC), for your property, you could be allowing yourself to enter into unnecessary risks.
A personal residence can be owned in a land trust. A properly drafted land trust can keep your name out of the public records. When a would-be litigant or contingent fee attorney looks up the real estate you own to see if you are a deep pocket, owning your home in a land trust makes that feat a bit harder for them to accomplish. Real estate held in a correctly structured land trust doesn’t show up under your name.
Anyone sitting at home with a computer who knows your name can go online and see what real estate you hold in your personal name. Someone who means you or your family harm can easily find out. That is why many successful businesspeople and celebrities mask their ownership by using land trusts to own their homes.
Income property can also be held in a land trust or, better yet, a land trust with an LLC as a beneficiary. Owning one’s personal residence in a company may not be favorable for some of the tax benefits of homeownership. That is why a land trust is used instead.
Real Estate Privacy and Protection
A land trust is for privacy of ownership. It is not an asset protection device or liability shield. An LLC provides both. So, that is why, with income property, the land trust can be owned by an LLC. More technically speaking, the beneficiary of the land trust can be an LLC. The LLC does at least two things for you. First, it can act as a liability shield if someone sues for an action connected with the property. A slip and fall, fire, or other injury that results in a lawsuit can be caught in the trap of the LLC instead of jumping on you personally. Second, when you are sued in your personal life, there are provisions in the law that can protect the LLC or anything inside of it from being taken away from you.
For example, if somebody gets injured on one of your properties, the injured party could sue you for far beyond the limits of any insurance policy. If the injured party successfully takes the litigation far enough, they can collect against all of your nonexempt assets, plus the property, itself—and if that nightmare scenario happens, many have been made bankrupt by merely owning a piece of real estate in his or her name.
Therefore, by making sure you own your income property through a limited liability company, you limit the risk of a lawsuit associated with the property. Under a limited liability company, all the injured party can attempt to collect is the property owned by that entity. This factor means your other assets can be protected from winding up in the hands of your legal opponent, thus, helping to shield your overall net worth.
To protect the equity in the real estate itself, there is a technique called “equity striping.” Equity striping is where a mortgage or deed of trust recorded against the property for the bulk of the equity. This works most commonly in combination with establishing an offshore trust. When the “bad thing” happens, there are lenders offshore that will “buy” the mortgage and place the cash in a “you can’t touch it account,” in your offshore trust. (Naturally the offshore lender is not going to freely give you cash secured by real estate in another country.)
With the funds sitting in an account, you can show the courts an actual account statement as to where the funds have been distributed. The offshore trust puts the funds beyond the reach of the local courts. In order to make the loan go away, either sell the property which will pay off the loan and your “you can’t touch it account” will be converted into a “you can touch it account.” Alternatively, once the threat has subsided you can ask the trustee to work with the lender to eliminate the loan.
Pitfall #5: Thinking a Living Trust Provides Asset Protection
If you decide upon establishing an intervivos (living) trust, know that it most likely will not provide asset protection from lawsuits if you or your children when they receive the assets, are sued. So, consider if an irrevocable trust with estate planning and asset protection provisions is right for you.
If you decide to establish an irrevocable living trust for asset protection purposes, avoid attaching too many strings between you and the the assets placed inside of the trust. For example avoid reserving the power to revoke, rescind, or amend the trust if possible, otherwise it will fail the test as an asset protection trust. Furthermore, avoid any means of allowing yourself to reclaim property you transfer into that trust. Whatever you can do to the trust, your judgment creditor can step into your shoes and do the same. If you can change the beneficiary to someone else, your judgment creditor could change it to himself or herself.
Asset Protection Trusts
Also, make sure you retain no personal authority on how you plan to have your trust managed or handled. Make sure that you do not keep too much power over the trust. To make the trust functional for asset protection, you must avoid being the trustee. You also need to stay away from appointing your spouse, parents, children, controlled employees or agents of yours as trustees.
Why must you be careful about appointing your trustee? It’s very common for courts in all states to examine relationships between the grantor and trustee to determine whether or not the trustee is in too close of a connection with the grantor. If so, the courts could deem that person your alter ego, a person so close to you that they might as well be you for trust decision making purposes.
What you need to do is appoint an independent trustee because doing this will help you avoid a major pitfall and save you from legal trouble. If you are curious about what the pitfall here is, realize that appointing a trustee who is not independent from the grantor in the eyes of the court allows the courts to earn the right to ignore the trust’s asset protection provisions and can allow your creditors to claim the trust assets. It is an excellent idea to appoint a corporate trustee, such a trust company or even a bank, to help carry out your wishes in your trust. A trustee like this is not considered too close or too familiar to the courts. This fact means that in the long run, using a corporate trustee provides you with better assurance over your trust.
LLCs, Limited Partnerships, and Trusts
The main thing to remember with irrevocable trusts is that they do come with some control restrictions. Many times, people decide upon other ways to protect their assets, such as limited partnerships and LLCs. Both of these legal tools can provide individuals and corporations with some respectable asset protection when properly established. As mentioned above, when a member of an LLC or a limited partner of an LP is sued, there are provisions that protect the company and the things it owns from being taken away. Furthermore, limited partnerships and LLCs can be “revocable” without penalty or interference from the court system. This allows you to protect your assets and maintain control.
As far as trusts are concerned, it is far more common for people to choose revocable trusts rather than irrevocable trust. The most common is the revocable living trusts, providing estate planning. There are a few things to remember about these types of trusts.
First, revocable living trusts give you as the grantor more power over assets than do irrevocable. Plus they assist you with estate planning. One thing they do not do well is to provide asset protection. For instance, your assets in a revocable trust can be claimed by creditors just as easily as assets that you hold yourself, individually.
Furthermore, if you can revoke or modify your trust independently, you then open up the door to trouble from creditors. By having the ability to revoke or modify your trust, it is then possible for your creditors to force you to change the trust beneficiaries to themselves so they can claim the assets for their own benefit.
By knowing how to protect assets and the pitfalls to avoid, you can better prepare yourself with a stronger asset protection structure for yourself and those you designate to receive your inheritance to in the future. Avoiding asset protection pitfalls should provide you with far more assurance and peace of mind, so that you will have the satisfaction of knowing that your assets will remain safe and secure for generations to come. With the knowledge about asset protection pitfalls comes the power to avoid them, offering you the safety and assurance that your life savings can continue to be protected for yourself and your loved ones.
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