Asset protection is an important part of comprehensive estate planning. Its primary objective is to protect an individual’s assets from potential creditors, lawsuits, and other unforeseen liabilities. Combining estate planning with asset protection ensures not only the distribution of one’s assets according to their wishes upon death, but also the preservation of those assets during their lifetime.
Common Strategies
Some commonly discussed strategies include:
- Wills and Trusts: A Last Will and Testament allows you to dictate how you want your assets to be distributed upon your death. Trusts, however, can provide more control over asset distribution and can also offer some level of protection against creditors. Different types of trusts can be used for asset protection:
- Revocable Living Trusts: While these are excellent for avoiding probate and providing for incapacity, they offer no asset protection during the grantor’s life. However, they may offer protection for beneficiaries after the grantor’s death.
- Irrevocable Trusts: These trusts cannot easily be amended, which makes assets within them less accessible to creditors. Types include irrevocable life insurance trusts (ILITs) and certain dynasty trusts. A dynasty trust, or perpetual trust, is a type of trust that is designed to pass on wealth from generation to generation in a tax-advantaged environment. Families can avoid being subject to gift tax, estate tax, and generation-skipping transfer tax as long as the assets remain in the trust. A dynasty trust allows you to protect assets for a long duration of time. Because the assets are owned by the trust, and not by the beneficiaries, the assets are not included in their taxable estates. This means that creditors and divorce courts cannot go after the assets held by the trust.
- Gifting: By giving away assets over time (by making use of the annual gift tax exclusion), you can reduce the size of your estate. This can help in terms of estate tax, as well as protect assets from potential creditors. However, there’s a need to be cautious about gift tax implications and look-back periods if considering Medicaid.
- Family Limited Partnerships (FLPs) and Family Limited Liability Companies (FLLCs): By converting assets into shares of a family limited partnership or a family limited liability company, a family can centralize the management of assets, protect them from creditors, and potentially take advantage of valuation discounts for tax purposes.
- Tenancy by the Entirety: In North Carolina, real property and certain personal property owned by a husband and wife as tenants by the entirety are generally protected from the creditors of just one spouse.
- Retirement Accounts: Qualified retirement accounts, like 401(k)s and IRAs, may have some protection against creditors under federal and state law.
- Insurance: This includes life insurance, annuities, and homeowner’s insurance. In North Carolina, life insurance proceeds, when paid to a beneficiary other than the estate, are generally exempt from the claims of the insured’s creditors. Likewise, certain annuities might offer protection against creditors.
- Homestead Exemption: North Carolina and South Carolina offer a homestead exemption, which can protect a portion of the equity in your primary residence from creditors. Properly titling the home to take maximum advantage of