NC and SC Estate Planning and Elder Law Firm

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 the exemption can offer significant asset protection.
• Diversification: Holding assets in different jurisdictions (especially in jurisdictions with strong asset protection laws) can make it harder for creditors to access them.
• Asset conversion: This is a part of estate planning that involves transforming one type of asset into another form that might offer more favorable tax treatments, protection from creditors, or other benefits. For example, asset conversion might involve changing the form of an investment to diversify and protect against economic downturns in certain markets. It might also involve turning illiquid assets, like real estate, into more liquid ones, like securities, to facilitate easier management or distribution.

Things To Keep In Mind While Engaging in Asset Protection Strategies

• Integration with Estate Planning: The strategies for asset protection should align with the broader goals of the estate plan. For example, transferring assets to an irrevocable trust might protect them from creditors, but then they are also removed from your estate.
• Avoid Fraudulent Transfers: Transferring assets with the intent to defraud creditors can lead to serious legal consequences. Asset protection planning should always be proactive, not a reaction to a known claim or lawsuit.
• Stay Updated: Since laws change, it is essential to review and adjust strategies periodically.
• Seek Expert Advice: Asset protection and estate planning can be complex and intersect with various areas of law. Consult with legal, financial, and tax professionals to ensure your strategies are both effective and compliant.

Takeaway

In summary, when incorporated into estate planning, asset protection strategies can offer peace of mind, ensuring the preservation and distribution of your wealth in accordance with your wishes. If done proactively and appropriately, it can have the added benefit of providing protection from creditors.

Contact an Experienced Estate Planning Attorney

Before making any decisions, it is always advisable to consult with an experienced estate planning attorney to ensure that you are making the most informed decisions for your specific circumstances. Monk Law Firm has skilled attorneys experienced in estate planning and can determine what is the best approach for you. Reach out to our office today for an initial consultation.