Asset Protection: It’s a Good Thing 

Asset protection can be defined as: Taking steps to protect your assets.  The two main tools to protect your assets are insurance and the law.  Sometimes we use both together with astounding benefits.  In any event, asset protection is good for you, your family and your legacy. 

Asset Protection with Insurance: The first line of defense for most of us is to purchase insurance.  We pay a premium to buy a policy that will protect us in the event of loss.  In any event, whether the risk that is being insured against is the cost of an auto accident (auto insurance), or the cost of health costs (health insurance), or the cost of losing a loved one (life insurance), or the loss that can emerge from a natural disaster, in all cases . . .  a premium is paid to a company and the company assumes the obligation to pay if there is a covered loss.

Asset Protection with the Law:  The next line of defense for us is to use “the law” to protect our assets. The protection afforded here, by using trust law, can be tremendous and can be accomplished easily with the assistance of a qualified professional.  The law can be used to guard against: (1) loss to lawsuits, (2) loss to divorce, (3) loss to federal government in federal estate taxes, (4) loss to federal government in accelerated income tax payments.  You see, if you leave assets to your loved ones in trust for their benefit, they can obtain all the benefits of ownership but not have the perils that come with ownership.  What perils?  Lawsuit risk. Divorce risk. Estate tax risk.  There are more risks, but those are the big three. 

An example best illustrates.  Let’s say Max is married to Josephine and they have one child whose name is John.  John is very successful and is married to Isabelle.  John and Isabelle have one child: Sam.  If Max and Josephine provide in their wills or trusts that John is to inherit all free of trust when survivor passes, then John will inherit all those funds and will be able to lose it in a lawsuit, he can lose it in a divorce, he can squander it by careless spending, and he can lose a lot of it to federal estate taxes.  Sam may never see a penny of those funds. 

If, on the other hand, Max and Josephine, leave all they have to John as Trustee of a trust which is for the benefit of John, then those funds can be protected from John’s creditors and John’s spouse (if they later divorce).  The trust can provide John with full rights to all the income and the principal during his life, with the ability to say where the funds will go when John passes.  This is called giving John a “limited testamentary power to appoint” the assets.  Doing this can give John control . . . but not enough control to subject the assets to the federal estate tax in John’s estate before the funds go to Sam and his siblings.  Trusts need to be drawn carefully to accomplish both objectives.  If Max and Josephine wish to constrain John’s ability to leave assets to any one other than Sam and Sam’s future siblings, they can do that, too.  The options are almost endless, but the key is Max and Josephine can leave the assets to John protected and also so John has all the benefit of the funds (as a “beneficiary”) and can also ensure it will stay in the blood family. 

The moral of the story is that asset protection is good for you and your family.  All tools available to you should be used.  We live in a litigious society.  Approximately 50% of marriages end in divorce.  Leaving assets in trust should be looked at closely in every case.

Contributed by:

Mark F. Winn

Attorney at Law, PLLC å