Estate planning to determine the way a person’s assets will be distributed upon their death is only the tip of the iceberg. From conservative incapacity planning to diligent probate avoidance, there is a lot that goes into crafting a comprehensive estate plan. One important factor to consider is asset protection.

One of the most important things to understand about asset protection is that not much good can come from trying to protect your assets reactively when surprised by situations like serious illness, bankruptcy or divorce. The best way to take full advantage of estate planning is to prepare proactively long before these things ever come to pass — and hopefully, many of them won’t. First, let’s cover the two main types of asset protection:

Asset protection for yourself:

This is the kind that has to be done long in advance of any proceedings that might threaten your assets, such as bankruptcy, divorce, or judgment. As there are many highly-detailed rules and regulations surrounding this type of asset protection, it’s important to lean on your estate planning attorney’s expertise.

Asset protection for your heirs:

This type of asset protection involves setting up discretionary lifetime trusts rather than outright inheritance, staggered distributions, mandatory income trusts, or other less protective forms of inheritance. There are varying grades of protection offered by different strategies. For example, a trust that has an independent distribution trustee who is the only person empowered to make discretionary distributions offers much better protection than a trust that allows for so-called ascertainable standards distributions. Don’t worry about the complexity – we are here to help you best protect your heirs and their inheritance.

This complex area of estate planning is full of potential miscalculation, so it’s crucial to obtain qualified advice and not rely solely on common knowledge about what’s possible and what isn’t. As a general outline, let’s take a look at three critical junctures when asset protection can help, along with the estate planning strategies we can build together that can set you up for success.

Bankruptcy

It’s entirely possible that you’ll never need asset protection, but it’s much better to be ready for whatever life throws your way. You’ve worked hard to get where you are in life, and just a little strategic planning will help you hold on to what you have so you can live well and eventually pass your estate’s assets on to future beneficiaries. Experiencing an unexpected illness, accident or even a large-scale economic recession could mean you wind up bankrupt.

Bankruptcy asset protection strategy: Asset protection trusts

Asset protection trusts hold on to more than just liquid cash. You can fund this type of trust with real estate, investments, personal belongings, and more. Due to the nature of trusts, the person controlling those assets will be a trustee of your choosing. Now that the assets within the trust aren’t technically in your possession, they can stay out of creditors’ reach — so long as the trust is irrevocable, properly funded, and operated in accordance with all the asset protection laws’ requirements. In fact, asset protection trusts must be formed and funded well in advance of incurring or defaulting on a debt and have numerous initial and ongoing requirements. Irrevocable trusts are not for everyone, but can be a great fit for the right type of person.

Divorce

One of the last things you want to happen to the nest egg you’ve saved is for it to be lost as a result of your child’s divorce. In order to make sure your beneficiaries (and not your former son/daughter-in-law) get the parts of your estate that you want to pass onto them — is a discretionary trust.

Protection strategy: Discretionary trusts

When you create a trust, the property it holds doesn’t officially belong to the beneficiary, making trusts a great way to protect your assets in a divorce. Discretionary trusts allow for distribution to the beneficiary but do not mandate any distributions. As a result, they can provide access to assets but reduce (or even eliminate) the risk that your child’s inheritance could be seized by a divorcing spouse. There are a number of ways to designate your trustee and beneficiaries, who may be the same person, and, like with many legal issues, there are some other decisions that need to be made. Discretionary trusts, rather than outright distributions, are one of the best ways you can provide robust asset protection for your children.

Family LLCs or partnerships are another way to keep your assets safe in divorce proceedings. Although discretionary trusts are advisable for people across a wide spectrum of financial means, family LLCs or partnership are typically only a good fit for very well-off people.

Judgment

When an upset customer or employee sues a company, the business owner’s personal assets can be threatened by the lawsuit. Even for non-business owners, injury from something as small as a stranger tripping on the sidewalk outside your house can end up draining the savings you’ve worked so hard for. Although insurance is often the first line of defense, it is often worth exploring other strategies to comprehensively protect against this risk.

Protection strategy: Incorporation

Operating your small business as a limited liability company (commonly referred to as an LLC) can help protect your personal assets from business-related lawsuits. As mentioned above, malpractice and other types of liability insurance can also protect you from damaging suits. Risk management using insurance and business entities is a complex discipline, even for small businesses, so don’t only rely on what you’ve heard online or “common sense.” You owe it to your family to work with a group of qualified professionals, such as your estate planning attorney and an insurance advisor, to develop a comprehensive asset protection strategy for your business.

These are just a few ways we can optimize your estate plan in order to keep your assets protected, but every plan should be tailored to an individual’s exact circumstances. Give us a call today to discuss your estate plan’s asset protection strategies.