Protecting Your Assets
Asset protection is often a primary goal of estate planning. In this blog post, we share a few strategies that you may utilize to increase protection of your assets from creditors.
At the outset, it’s important to understand that most asset protection strategies are effective only against future creditors. With this in mind, it is important to get out in front of potential liability issues and discuss asset protection concerns with your advisors.
Strategy 1: Move Money to Exempt Assets
Certain assets are exempt from creditors under Texas law, including your primary residence (with some limitations on acreage), retirement plans, college savings plans, and certain personal property (e.g., a vehicle for each family member with a driver’s license and two firearms).
Since cash and other assets (like brokerage accounts) may be an easy target for creditors, one relatively simple asset protection strategy is to move the exposed assets to assets that are protected under Texas law.
For example, you may want to pay down your mortgage or purchase a new primary residence. Alternatively, you may want to set aside money for a child’s college tuition or purchase a new vehicle.
Moving your money to exempt assets is perhaps the easiest (and cheapest) way to increase protection from creditors.
Strategy 2: Isolate Risky Assets
Forming a limited liability company (LLC) or other business entity to hold risky assets like rental properties and businesses can provide increased creditor protection.
For example, if you own a rental property with a pool, you may be concerned about potential liability from a drowning or pool injury. If an injury or death occurs, and you own the rental property in your individual name, your personal assets may be subject to liability (to the extent your insurance policy failed to satisfy the liability) for the accident. By contrast, owning the rental property through a properly operated LLC (or other type of business entity) would limit your exposure to the assets owned by the LLC. Your other assets would not be available to the injured party. For this reason, folks owning multiple rental properties may wish to have a separate LLC for each property.
Similarly, isolating your business interests from your personal assets will provide additional creditor protection. It is extremely important to consult with an attorney prior to starting a new business to ensure that you carefully structure the business to limit your exposure to creditors. If you are currently operating a business as a sole proprietorship or general partnership, you should strongly consider changing the business structure to an LLC, corporation, or limited partnership to achieve greater asset protection benefits.
Strategy 3: Transfer Assets to an Irrevocable Trust
Another way to limit creditor protection is to depart with ownership of assets. For example, you could create an irrevocable trust for the benefit of your spouse and/or children. The assets you gift (or sell) to the trust would be protected from your creditors and the beneficiaries’ future creditors (while held in trust). By designating your spouse as beneficiary of the irrevocable trust, you also have the opportunity to indirectly benefit from trust distributions.
The trust described in the previous paragraph is often referred to as a Spousal Lifetime Access Trust (or SLAT). In addition to creditor protection benefits, a SLAT can also achieve estate tax savings for folks with a net worth in excess of the current estate tax exemption amount ($11.58mm per person in 2020).
It is important here to distinguish an irrevocable trust from a revocable trust (sometimes called a revocable living trust). Revocable living trusts, which are frequently used in estate planning, do not provide asset protection benefits while you are living.
Strategy 4: Increase Umbrella Coverage
Finally, it’s important to review your umbrella insurance coverage every few years, especially if you purchase a risky asset or your net worth significantly increases. Work closely with your insurance advisors to ensure you have adequate protection. We can help connect you with trusted advisors if you don’t already have someone in mind.
Conclusion
We hope the strategies discussed above are helpful to those of you interested in asset protection. However, please understand that all asset protection strategies come with limitations. For example, the bank providing a mortgage for your home or a loan for your vehicle will still have repossession/foreclosure rights if you fail to make your required payments. Additionally, some creditors like the IRS and state and local governments are “super creditors” that may have a broader reach than general creditors. Finally, as mentioned above, these strategies will not protect against existing creditors.
Let us know if we can help review your business or estate plan to address your asset protection concerns.
