ESTATE PLANNING: Asset and Family Protection

The term “asset protection” is defined and used in many different ways. Here, I use it to describe various methods by which people try to protect their assets, and thus themselves and their loved ones, from prospective “judgment creditors” – those in our litigious society who might successfully sue and obtain a judgment against you.

A retired former business owner (who, along with his wife, are among my favorite long-term clients) has scheduled an estate planning review meeting for January. In anticipation of the meeting, he sent me a N.Y. Times article titled the “Paradise of Untouchable Assets” – the Cook Islands. The author describes, and quotes the opinions of a number of experts about, this international asset protection haven. A growing number of wealthy foreigners, including hundreds of Americans, proactively park the bulk of their assets there. Cook Islands has strict bank secrecy laws and the courts there generally disregard foreign (e.g. U.S.) court orders. Hence, creditors here have a very difficult time enforcing judgments against an American’s assets there.

In his note to me, this client postulated that in these days of tremendous deficits and unfunded government liabilities, the government appears to have two choices – one, to confiscate private property; two, to make the dollar worthless. In light of this, he wondered whether transferring assets to the Cook Islands or some other such vehicle might make sense.

I have great respect for my client, who is very smart and curious, and is not as radical as he may sound. Offshore accounts have surface appeal – particularly to those with millions of dollars in assets and in high risk occupations or who have other reasons to fear being sued. I’m not an expert on these strategies, but based on what I’ve heard and read, they come with substantial risks, including the uncertainty of foreign governments and international politics. Accordingly, these strategies may or may not ultimately work; and meanwhile, the poison of worrying about that is likely not worth the supposed cure.

I am often asked “What are the best ways to protect my assets?” Aside from these intriguing offshore asset protection strategies (and some developing domestic strategies in certain states), the starting point is to purchase appropriate insurance policies. These policies should have a broad scope of coverage and adequate limits. In most cases, they should be accompanied by personal and business umbrella policies to cost-effectively increase your liability limits. Unfortunately, insurance will never cover all risks, but it can reduce or eliminate a huge number of them.

Revocable Living Trusts are a wonderful tool in many respects. However, despite widespread misconception, they do not offer creditor protection to the settlors – people who establish the trust. An important silver lining is that Revocable Living Trusts can, if drafted properly, offer robust creditor protection for the settlor’s beneficiaries (loved ones, such as children or grandchildren) via a “spendthrift” provision. An appropriate spendthrift provision prevents or makes it extremely difficult for a judgment creditor of your loved one from being able to take any assets from your trust to satisfy a judgment against such loved one.

If you are particularly interested in controlling risks for your loved ones, you can provide extra creditor protection by retaining assets in trust for many years following your death, or even for the entire lifetime of your loved ones. Such an extended or lifetime trust has some disadvantages, but it’s definitely worth discussing the benefit of keeping trust assets largely out of reach of your loved ones’ creditors (including their spouses and/or future spouses) while allowing them to take and use distributions as needed.

For those who own investment real estate or a small business, it is generally best to form, own and operate these assets in a business entity, such as an LLC or Corporation. Properly formed, capitalized and operated business entities shield the owner’s personal assets from the potential judgments of creditors that arise out of or are related to one’s business or investment activity.

Irrevocable Trusts (as opposed to Revocable Living Trusts) are also compelling asset protection vehicles. They can offer dramatic benefits, such as potential federal estate tax savings. They involve some loss of control, are somewhat expensive to set up and can be complex. Nevertheless, for people with substantial wealth, the advantages often outweigh the disadvantages.

This article is intended to provide information of a general nature, and should not be relied upon as legal, tax, financial and/or business advice. Readers should obtain and rely upon specific advice only from their own qualified professional advisors. This communication is not intended or written to be used, for the purpose of: i) avoiding penalties under the Internal Revenue Code; or ii) promoting, marketing, or recommending to another party any matters addressed herein.

Mr. Silverman is an attorney with R. Silverman Law Group, 1855 Olympic Blvd., Suite 125, Walnut Creek, CA 94596; (925) 705-4474; rsilverman@rsilvermanlaw.com.

ESTATE LEGAL SERVICES: Need to find an estate planning attorney in Walnut Creek CA? Contact Robert Silverman at 925-705-4474 for legal advice on Revocable Living Trust, Wills, Durable Power of Attorney, Advance Health Care Directive, Special Needs Trusts, and Irrevocable Trusts & Advanced Estate Planning, including Irrevocable Life Insurance Trust (ILIT), Qualified Personal Residence Trust (QPRT), Defective Grantor Trust (IDGT), Grantor Retained Annuity Trust (GRAT), “Crummey Trust”, and various types of Charitable Trusts.