In our previous post, we began looking at the importance of asset protection for estate planning and various options in this area. As we noted, trusts can be good tools for protecting one's assets from liabilities and creditors, as can qualified retirement plans.
Exemption planning is another option to look into. This refers to taking advantage of laws exempting certain assets from creditor claims or judgments, regardless of how much is owed. Which specific assets are exempted varies from state to state. Sometimes it makes sense to convert non-exempt assets to exempt ones. Bankruptcy is one area where exemption planning can be particularly useful, but there are others.
Insurance provides several useful routes for asset protection planning. Life insurance, for instance, not only provides security for loved ones in the event of your death, but can also protect assets from estate taxes when placed in an irrevocable trust. Liability insurance pays creditors in the event of a lawsuit as well as the majority of legal fees.
Captive insurance programs can be useful for business owners with excess cash flow. These allow for the creation of an insurance company to which premium payments are made. Those premiums will be tax deductible if properly structured, and can be placed in an irrevocable trust to achieve tax savings. Those premium payments are also inaccessible to creditors.
Variable life insurance has certain advantages with respect to asset protection. In these policies, the cash value is invested in a tax-free environment and the insured is allowed to take out a loan against the policy for use. These funds are protected from creditors and the loans will reduce the value of one's estate for estate tax purposes.
One final recommendation is for family limited liability companies and family limited partnerships. With these vehicles, investments are made in the entity and are protected from creditors.
There are many ways to approach asset protection, and this list should not be seen as exhaustive. It is wise to work with an attorney and a financial planner or accountant when engaging in asset protection planning.
Source: nuwireinvestor.com, "Asset Protection in Uncertain Times," Ward J. Wilsey, January 17, 2012.