You may feel as though your existing estate plan already protects your assets – and it may very well already cover many of the common threats to your assets. For example, you may already have thought about how your own divorce could be a threat because of the required division of marital assets. Economic downturn and failed business ventures are also things people typically recognize as possible threats to their assets. Most estate plans also take into account the impact state and/or federal gift and estate taxes will have on an estate. There are, however, other potential threats to your assets that may not already be addressed in your estate plan.
A threat you did not consider could do serious damage to your estate plan. For instance, 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 decide 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.
If you have worked hard and invested wisely throughout your working years, you undoubtedly want the assets you have amassed to be available to help provide a comfortable retirement. 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.
A popular asset protection planning tools is a trust. For a trust to be an effective asset protection tool, 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 trust can be further sub-divided into revocable and irrevocable living trust. 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 those trust are not protected from creditors and other threats. Assets transferred into an irrevocable living trust, however, become property of the trust, out of reach of the Settlor, and are therefore protected from threats.
People often hold title to property jointly with a spouse or adult child under the belief that because the property is jointly owned it is safe from creditor claims or other threats. That is not always the case. The type of joint title you choose makes all the difference. Certain types of joint ownership protect each owner from claims or liens of the other owner(s) – usually this refers to joint title with rights of survivorship. 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).
Decreasing the value of your taxable estate is the key to avoiding (or diminishing) estate taxes. The annual exclusion is an estate planning tool that is frequently used to help with tax avoidance. This tool allows you to make gifts valued at up to $15,000 ($30,000 if you gift-split with a spouse) to an unlimited number of beneficiaries each year tax-free. Gift made using the annual exclusion do not count toward your lifetime exemption.
Entering into a pre-nuptial agreement prior to the marriage, if both parties are willing, is the best way to protect your assets in the event the marriage ends in divorce. 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 create a spendthrift trust. A spendthrift trust prevents creditors or other third-parties from attaching trust assets and prevents a beneficiary from squandering the assets.
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.
There are a lot of common misconceptions out there about estate planning. One of the questions we get is “Can’t I just transfer some assets to my son or daughter to become eligible for nursing home benefits?” Actually, that is one of the worst things that you can do – you’ll actually create a penalty period - and so all of the advice that you’ve heard from a friend, a relative, or a neighbor – don’t do it unless you talk to us first. Give us a call – come on in for a free consultation at (317) 684-1100.
If you have additional asset protection planning questions, contact an experienced Indianapolis, Indiana asset protection planning attorney at Frank & Kraft by calling (317) 684-1100 to schedule a consultation.