Planning For Asset Protection
Introduction
There are a number of considerations that relate to protecting your assets from creditors. As we look at protection, it is important to focus on the various creditors that may pose claims against your assets. In that regard, we will review creditors' rights of different kinds.
The United States Government As The Creditor
Federal Estate Taxes can be greatly minimized or eliminated altogether. A common planning tool is to create a two trust arrangement which, according to federal provisions, can limit the exposure to taxes by funding both trusts. Upon the death of one spouse, the assets are allocated to a trust that has limitations consistent with the Internal Revenue Code. The assets in the trust of the deceased spouse are not included in the estate of the surviving spouse upon the subsequent death of the surviving spouse as long as distributions are limited to health, education, maintenance and support.
Traditional Forms Of Asset Protection
- Transfers to spouse - "Poor man's" asset protection
- Corporate ownership
- Family Limited Partnerships
- Limited Liability Company
- Joint ownership of property
- Exemption planning
- Homestead
- Retirement Plans
- Life insurance
Creditors' Rights Relating To Spendthrift Or Disabled Children
Special Needs
Trust provisions can be created to deal with children that might have special needs by restricting the use of trust funds only for items that are not covered by governmental resources. The creditor in this instance is the State of Kansas. The operative provision of such a trust is to make the distributions from the trust discretionary, which means that a trustee may choose to make the distributions or may not make the distribution. This impedes a creditor from reaching these assets because the trustee may choose to not make any distribution that could otherwise be reached by a creditor of the disabled child.
Children With Liabilities
Similar provisions can be put in a trust agreement that restrict the creditor of a child from reaching trust assets to satisfy a claim that the creditor may have against a child. It should be emphasized that it is not necessarily a spendthrift child that may encounter financial problems but financial problems may have arisen because of a dissolution of marriage, a business deal that turned sour or the loss of a job. In this regard, a trust can be structured so that the trustee pays the living expenses of a child directly so that the money never actually flows through the hands of the child. This is important from the standpoint that once the money leaves a trust, a creditor can reach it.
Kansas law does not permit a person to create a trust that avoids creditors' claims against the person establishing the trust. A trust can be created, however, by a parent, for example, to protect a child.
Assets That Are Exempt As A Matter Of Law
1. Homestead Exemption
Pursuant to Kansas law, a homestead within certain limits is exempt from the claims of creditors. Likewise, there are benefits that are available to a surviving spouse that are also exempt from creditors' claims.
2. Retirement Plan Assets
Certain retirement plans, pursuant to the Internal Revenue Code, are also exempt from creditors' claims. Qualified pension and profit-sharing Plans as well as individual retirement accounts are provided some protection from creditors' claims.
3. Life Insurance
Kansas law is unique in that a Kansas statute provides that life insurance proceeds are free from the claims of the insured's creditors and also the claims and judgments of the creditors of any person named as a beneficiary in the policy of insurance.
Domestic Asset Protection Trusts
Nine states have enacted legislation providing spendthrift protection to a settlor-beneficiary of a discretionary trust (provided the transfer is not a fraudulent conveyance).
- Alaska
- Delaware
- Nevada
- Missouri
- Rhode Island
- Utah
- South Dakota
- Tennessee
- Wyoming