In reality, asset protection can be an important piece to the puzzle. In addition to the estate planning implications, the proper planning can protect your resources for your own benefit while you are still living.
Small Business Asset Protection
If you own your own small business, you are taking a risk if you have a sole proprietorship because there is no separation between your personal property and your business. A work-related lawsuit could result in personal losses, and there is no reason to take any risks.
You could establish a limited liability company (LLC) to create a shield of separation. Creditors seeking satisfaction from your business would not be able to reach your personal resources, and the asset protection would also work in the opposite direction.
The protection applies to other types of lawsuits as well, but there is an exception if you are directly and personally responsible for damages that negatively impact another individual.
Another benefit is pass-through taxation. Even though you enjoy the asset protection, you can still claim your profits and losses on your personal income tax returns.
A family limited partnership (FLP) is another asset protection structure that can be utilized. As the name would indicate, participants in the partnership must be members of the same family.
If you were to establish a family limited partnership, you would be the general partner, and the family members that you bring into the fold would be limited partners. As a general partner, you would maintain sole decision-making authority.
Going forward, the personal property that is owned by the partners would be protected if the partnership is sued. For example, you could convey an apartment building into a partnership. If someone is injured on the property, the partners’ personal resources would be protected.
Self-Settled Asset Protection Trust
When it comes to asset protection if you are not a business owner, a self-settled asset protection trust is a possibility. Under most circumstances, assets that are conveyed into this type of trust would be protected from future creditors.
Most states in the union do not recognize these trusts, but here in Ohio, you can establish a self-settled asset protection trust.
Federal Estate Tax
A small percentage of Americans are exposed to the federal estate tax right now, but the percentage could be higher in the relatively near future.
The federal estate tax exclusion is the amount that can be transferred before the estate tax can be applied on the remainder. Right now, it is $11.7 million, but the provision contained within the Tax Cuts and Jobs Act that established this exclusion is going to expire at the end of 2025.
At that time, it is going to be reduced to $5.49 million, and this tax carries a 40 percent maximum rate, so it can have a significant impact.
Fortunately, there are steps you can take in advance to protect your assets if taxation is going to be a source of concern for you.
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