Vanessa J. Skinner is a shareholder with the firm of Winderweedle, Haines, Ward & Woodman, P.A., where she chairs the firm’s Wills, Trusts & Estates Department. She was recently named one of the Best Lawyers in America in the area of Elder Law for the third consecutive year. She is the host of The Power of Planning Podcast, anchor.fm/thepowerofplanning.
If you are like most Americans, you have worked hard for many years and scrimped and saved to accumulate a certain level of wealth for retirement. Now you need to make sure that your nest egg is not vulnerable to attack by future potential creditors. Asset protection planning is an integral part of any estate planning discussion and often involves implementing one or more of the legal techniques outlined below.
Each state has laws which identify certain assets that are exempt or free from seizure by judgment creditors. Depending on your state of residence, exempt assets can include your homestead property, the cash surrender value of life insurance policies, the proceeds of annuity contracts, retirement accounts, health or medical savings accounts, and 529 accounts. It is helpful to know which assets are exempt in your state when formulating your asset portfolio. In some instances, non-exempt assets can be converted into exempt assets.
Having sufficient insurance coverage is a critical component of asset protection planning. Liability exposure occurs when a legal judgment surpasses your existing coverage. Umbrella insurance provides extra liability coverage beyond the limits of your existing homeowners, automobile, and watercraft insurance policies. Umbrella insurance policies typically start at $1 million in coverage and are sold in $1 million increments.
Depending on how you title them, assets that you own jointly with another may provide you better or worse creditor protection. With tenants by the entirety titling, which are assets jointly owned by spouses in those states that recognize such titling, such assets are not subject to attack by a creditor of one spouse. Rather, the creditor must be a creditor of both spouses in order for such assets to be vulnerable. In connection with this type of titling, spouses are generally discouraged from titling their vehicles in their joint names. Doing so can result in both spouses getting sued if one spouse causes a car accident since a potential plaintiff typically sues the driver and owner(s) of the vehicle. Similarly, owning the vehicle your teenage or young adult child drives can expose you to liability if your child causes an accident. Assets that you own with an adult child as joint tenants with right of survivorship can also be subject to the claims of your child’s potential creditors.
Limited Liability Company
Owning rental property in your personal name presents unique liability concerns because of the possibility of lawsuits initiated by tenants. A landlord can be held legally responsible when a crime occurs or when personal injuries and property damage are sustained on the rental property. Liability exposure can be mitigated with a well-crafted lease agreement and proper insurance coverage, including underlying and umbrella liability coverages as indicated above, as well as requiring tenants to have renters’ insurance in place. However, often the most effective way of protecting your personal assets from liability associated with a rental property is having such property be owned by a limited liability company (“LLC”) you establish instead of you personally. Although there are start-up and ongoing costs and administrative requirements with operating an LLC, many feel these are outweighed by the asset protection benefits it affords. If you are not buying the rental property in the LLC from the outset, and are instead transferring a property you personally own to an LLC, be aware of any requirements to obtain a mortgage lender’s prior approval and of any possible documentary stamp taxes that may be assessed on such conveyance. Further, a commercial liability insurance policy will need to be secured for the LLC property.
Asset Protection Trusts
These trusts must be irrevocable and are designed to hold assets for purposes of shielding them from creditors. Domestic asset protection trusts can only be established in states which allow them. A foreign asset protection trust is an offshore trust set up outside the United States. Drawbacks include cost and loss of control over trust property.
This information is designed to empower you to retain the appropriate professionals who can help you develop an asset protection plan that is best suited for you and your assets.
This article is featured in the Spring 2023 issue of The Growing Bolder Digital Digest.