Implementing asset protection strategies is essential if your estate is at risk in any way. However, since California does not allow individuals to create domestic asset protection trusts, it requires careful—and sometimes creative—planning to ensure your assets aren’t gobbled up by litigation, creditors, a spendthrift spouse or child, business partners, and so on.
Scheduling a consultation with an estate planning attorney is the first step in evaluating your situation from all angles and designing an estate plan that engages strategies to protect assets from potential threats or risks.
Top 5 Risks To Your Assets
Here are some of the top five risks that threaten your estate’s assets before and after you die. Working with an experienced estate planning attorney can ensure all of these remain in the hands of your preferred heirs and beneficiaries.
Not having a legal estate plan in place
The biggest risk to your assets is not having a current, legal estate plan in place. When you die without a will or trust in California, or if your will/trust is easily contested, your assets will move into the probate court’s hands, where they’ll be distributed via California’s intestate succession laws.
And, as you’ll see in some of the protection strategies used below, these asset protection strategies for estate plans aren’t only about “after you die.” Many of them protect your assets from the moment you put them into place, which is an example of how estate plans—and estate planning tenets—are just as necessary while you’re alive as they are if you become incapacitated or after you die.
Creditors or litigators
Creditors are the first in line to get what they are owed from your estate after you die, and they are legally entitled to do so. Depending on the amount of your debt and unpaid bills, which could also stretch from your business (more on that below), your estate can be quickly whittled down, significantly reducing the amount you have left for heirs and beneficiaries.
Even those with a modest estate should consider some type of asset protection if:
- You have significant recurring/revolving credit card debt.
- There is a substantial balance on private student loan debt (most federal student loan debt is discharged after someone dies, but that’s not necessarily true for private loans).
- The balance on your mortgage is particularly high, OR more than the home is worth.
Similarly, your estate is vulnerable to any litigation that may arise regarding monies owed or agreements made, especially if your business was vulnerable. Doctors and lawyers are also prone to being sued and are often advised to implement asset protection strategies when creating their estate plans.
Business partners and other related parties
If you own your own business, structuring assets under the correct business entity is one of the most effective ways to protect personal wealth from business liabilities. Your estate planning attorney can help you with this or provide referrals to qualified business law attorneys who can do that for you.
Hefty or unnecessary taxation
Taxes take their toll on larger estates or on more significant assets (like the inheritance of a primary or a vacation home). There is nothing that can be done to protect your estate from unnecessary taxation after the fact, so proactive estate planning—including asset-guarding tax strategies—is key.
Spendthrift spouses, children, or other beneficiaries
Are you worried that everything you’ve worked so hard for—or that is a legacy inheritance from your loved ones—will be squandered by a spendthrift child, spouse, or other beneficiary? Your estate planning attorney can help with that, which can include a spendthrift trust that regulates how much money can be allocated to the heir in any given year.
Other threats to an estate plan can arise, but implementing asset protection is a powerful step to safeguarding your intentions.
Implementing Asset Protection: 7 Examples of Strategies Used in Estate Plans
Here are some of the strategies used by estate planning attorneys to protect our clients’ assets. Again, these strategies are personal and customized to each client’s situation, so meeting with an estate planning attorney is the only way to know which ones make the most sense for you and your family.
Prenuptial agreements
If you have a significant estate and plan to get married, speak to your attorney about the benefits of a prenuptial agreement. The day you get married in California, everything you make and every asset you attain—aside from personal inheritances—is considered community property.
A prenuptial agreement can provide a different set of rules within that community property agreement, particularly if you earn significantly more than your partner or are marrying someone who chooses to live a more extravagant lifestyle than you do. Prenuptial agreements can also help to smooth the waters if you are getting remarried and children are involved.
Irrevocable trusts (asset protection trust)
Establishing an irrevocable trust is a final decision. Irrevocable means just that: once you establish an irrevocable trust, you cannot change it in any way. These are used in various ways to meet our clients’ needs, but sometimes it can be as simple as ensuring an adult child with special needs is financially taken care of, no matter what.
Making specific choices about retirement accounts and other financial decisions
Some retirement accounts are protected (exempted) from creditors. The same is true for specific life insurance policies, long-term care policies, and some annuities. By making savvy choices about the types of retirement accounts you select, or the insurance and annuities you invest in, you may protect that portion of your assets.
Retitling property and other assets
Like irrevocable trusts, you need to be very careful before changing or transferring property/asset titles for asset protection purposes. Once that person’s name is on the title, they are the legal owner, so it must be someone you trust implicitly. Alternatively, consider retitling it to two people, so there is a bit of “checks and balances” at work.
Homestead exemptions
California automatically extends homestead exemptions for a portion of the property’s equity for primary residences. This exemption protects your property from creditors while you’re alive and can protect your spouse/whoever is on the title with you from creditors after you die. The amount of equity included in California’s homestead exemption laws varies from county to county.
Transferring assets into your business
Above, we talked about protecting personal assets from your business assets. However, in some cases, we recommend doing the opposite and using your business LLC or FLP (family limited partnership) to protect personal assets. By transferring personal assets to an LLC or FLP, they are legally separate from your family’s estate.
Being adequately insured
Having adequate insurance is another way to protect your assets. Just as you should revisit your estate plan every year or so to ensure it’s current, insurance policies are worthy of annual reviews with a trusted agent to ensure you have adequate coverage for your assets and any potential risk.
Tseng Law Firm Provides Customized Asset Protection For Clients & Their Families
Are you interested in learning more about how to implement adequate asset protection strategies into your estate planning process? Schedule a consultation with Tseng Law Firm. We’ll walk you through the estate planning process with a highly personalized approach, ensuring that our results align with your personal outlook on family, money, health, and values.