Protecting Your Assets FAQs

Most people are aware of the more common threats to their assets. These are the threats that you may have already addressed in your estate plan; however, they are worth mentioning anyway just in case you are not aware of them. Common threats include things such as your own divorce, which threatens your assets because of the required division of marital assets. An economic downturn or a failed business venture are also things people typically recognize as possible threats to their assets. Finally, you have probably already been made aware of the impact federal and/or state gift and estate taxes could have on your estate assets as well.

If you are aware of a threat, you usually take steps to mitigate the damage that threat can do to you and your estate. It’s the threats that you are not aware of, therefore, that are the most dangerous. For example, have you considered how the cost of long-term care (LTC) could pose a threat to your assets? Unless you can afford to pay for LTC out of pocket, you may be forced to turn to Medicaid for help. The Medicaid asset limit and corresponding “spend-down” rules could result in the loss of a significant portion of your assets if you need LTC down the road. Another potential threat that most people overlook is the “in-law” threat. You already know that your own divorce poses a threat to your assets, but so does the divorce of a beneficiary. If your daughter and son-in-law decided to end their marriage, the assets gifted to your daughter could end up in your son-in-law’s possession as part of the divorce if you aren’t careful.

Understandably, people want to hold onto their hard-earned assets so they are available when they retire and/or to pass down to children and other loved ones. Asset protection planning refers to the tools and tactics incorporated into an estate plan to prevent the various threats to your assets from causing you to lose some, or even all, of your assets.

By far, one of the most popular asset protection planning tools is a trust; however, it must be the right type of trust and the trust agreement must be properly drafted. Trusts are broadly divided into testamentary and living trusts. Testamentary trusts do not activate until the death of the Settlor whereas a living trust activates when all elements of formation are complete. Living trusts can be further sub-divided into revocable and irrevocable living trusts. A revocable trust can be modified or revoked by the Settlor without the need to provide a reason whereas an irrevocable living trust cannot be modified or revoked by the Settlor. Because both a testamentary and a revocable living trust can be modified or terminated by the Settlor, the assets held in the trust are not protected from creditors and other threats. Assets transferred into an irrevocable living trust, however, become the property of the trust, out of reach of the Settlor, and are protected.

A common mistake people make is to assume that holding title to property jointly with a spouse or adult child means the asset is safe from creditor claims or other threats. That is not always the case. It depends on what type of joint title is used. Certain types of joint ownership protect each owner from claims or liens of the other owner(s). With other types of joint ownership, however, your interest in the property could be at risk because of a lien or claim filed against the co-owner(s).

Typically, the key to avoiding (or diminishing) estate taxes is to decrease your taxable estate. One commonly used tool for accomplishing that goal is the annual exclusion.  This tool allows you to make gifts valued at up to $16,000 or $32,000 if you gift-split with a spouse (as of 2022) to an unlimited number of beneficiaries each year tax-free. Gifts made using the annual exclusion do not count toward your lifetime exemption.

One common solution is to enter into a pre-nuptial agreement prior to the marriage if both parties are willing. One thing you also need to avoid is “co-mingling” assets during the marriage which turns your separate property into marital property.

If you have a beneficiary who concerns you, either because of his/her spouse or because he/she has an addiction/gambling problem, one option is to use a trust to pass down an inheritance. The assets legally belong to the trust until they are distributed to your child, meaning they will not be subject to the division of assets in the event of divorce, nor can they be squandered if the Trustee provides oversight as to the use of the assets.

Transferring assets into an irrevocable trust can keep them out of the reach of most creditors. Another option is to use the proper type of joint title that prevents creditors of one owner from going after the property.

Medicaid planning is the key to avoiding the threat posed by the high cost of long-term care. As part of your Medicaid planning component, you may create a special type of irrevocable trust known as a Medicaid trust. This trust will protect your assets and ensure that you qualify for Medicaid if you need it in the future.