Common Asset Protection Mistakes in Estate Planning

We all know that estate planning includes decisions about what should happen to our assets upon our death or disability. However, people often overlook asset protection issues and strategies in the estate planning process. Asset protection is the shielding of assets from potentialcreditors and others.

Here are some common asset protection mistakes made in the estate planning process:

  1. Failure to consider asset protection in funding the trust.
    Some states allow property to be held in “tenancy by the entirety,” a form of joint ownership between spouses. As long as property is held in tenancy by the entirety, a creditor of one spouse cannot reach the asset. States vary as to whether this protection is lost if the asset is transferred to a trust. Similarly, states typically allow some of the value of a home as an exemption in bankruptcy. Some states even exempt the entire homestead. Again, states vary as to whether the protection of the homestead exemption applies if the property is in a trust.
  2. Failure to consider Medicaid planning. Millions of Americans become disabled each year. As Baby Boomers continue to age, more and more of the population will face long term care issues. Many Americans are forced to lose everything due to illness. There are three ways to avoid this problem. First, do not get sick. While this is the best option, it is not always possible to achieve. Second, carry adequate health and long-term care insurance. Third, include provisions in your trust, “Medicaid triggers,” that allow Medicaid planning to be done in the event of your disability.
  3. Failure to consider Special Needs Trusts for children with special needs – such as developmental disabilities, head injuries,
    chronic illnesses, etc. Millions of parents have children with special needs. These children are particularly hard hit by the loss of a parent, emotionally and financially. Without proper planning, assets left for such children may deprive them of government benefits. With a Special Needs Trust, the assets can continue to be available to improve the child’s quality of life while not making them ineligible for government benefits.
  4. Failure to consider the asset protection needs of children or other beneficiaries. While there are some limited ways to protect one’s own assets from creditors, it is much easier to achieve that protection when the assets are coming from someone else. A parent can leave the assets in trust for a child and have the assets available for the child’s needs and yet not available to that child’s creditors.
    Further, by leaving the assets in trust, the child’s spouse would not be
    able to claim a portion of those assets in the event of divorce.
  5. Failure to consider the use of limited liability entities.
    Rental property, sole proprietorships, farms, ranches, and other assets can pose significant risk. Many people continue to own these assets in their own names. However, someone receiving an injury associated with such property can sue the owner. If successful, the injured party can get all the assets of the owner and force the owner into bankruptcy. On the other hand, if the asset is operated through a corporation, a limited partnership, or a limited liability company (LLC), the owner can be insulated from personal exposure except for the value of the property in that entity. Entities also can be useful to achieve valuation discounts, which reduce estate and gift taxes.
  6. Failure to consider sophisticated asset protection. In certain situations, more aggressive and sophisticated asset protection techniques might be appropriate. These include the use of Family Limited Partnerships, Domestic Asset Protection Trusts, Offshore Asset Protection Trusts, and other entities.

Asset protection is an important aspect of estate planning. Without proper asset protection consideration, the assets you leave to your children might be quickly lost to ex-spouses, the government, and other creditors. A qualified estate planning attorney can help you address all of your estate planning goals, including asset protection.