Smart Estate Planning Begins With Protecting Your Assets

Updated September 9, 2024, to include the most current regulatory updates and industry insights.

It’s one thing to earn enough to live a comfortable lifestyle. It’s yet another to develop a plan for protecting your assets so that there’s more for your heirs after your death. If you’ve been fortunate enough to achieve the former, there are estate planning tips to help with the latter.

Asset protection may take many forms, ranging from the simple to the sophisticated, often involving a combination of several techniques. In any event, you should begin planning now instead of leaving matters to chance.

Back to the Basics

Traditionally, asset protection strategies have focused on avoiding or minimizing federal estate tax liability. Although estate taxes remain a concern for some families, most should find sufficient tax shelter under current estate tax law. However, be aware that estate taxes may still apply at the state level.

For instance, the Tax Cuts and Jobs Act (TCJA) hikes the unified gift and estate tax exemption to $10 million (subject to inflation indexing) for transfers to non-spousal beneficiaries and for assets passing tax-free to a spouse under the unlimited marital deduction. The indexed exemption amount for 2024 is $13.61 million. Also, portability effectively allows couples to double this tax shelter to $27.2 million. Finally, you can still use the annual gift tax exclusion of $18,000 per recipient in 2024.

Thus, you can simply “gift” assets to your loved ones, realizing the estate tax benefits of the exemption and gift tax exclusion amounts.

For some, asset protection is as easy as that — case closed. But this simplified approach requires you to give up control of those assets during your lifetime, which might not be desirable or feasible. As a result, more complex techniques may be preferred.

A Matter of Trusts

Frequently, trusts are featured in an asset protection plan. The traditional bypass trust (or A-B trust), which was created mainly to avoid federal estate tax, is still a viable option. Such trusts offer protection from creditors while continuing to provide tax shelter.

A similar variation, often called a spendthrift trust, can be established for a beneficiary who isn’t qualified to manage investments or might indulge in spending sprees. An independent trustee assumes the financial management responsibilities.

With a qualified terminable interest property (QTIP) trust, a grantor can provide an income stream for a surviving spouse while still determining the disposition of the trust assets when the spouse dies. This enables a surviving spouse to maintain a comparable lifestyle. A QTIP trust is often used by someone who has remarried and has children from a prior marriage. The children typically receive the assets when the trust terminates.

Another type of trust, the domestic asset protection trust (DAPT), has been growing in popularity. This is a “self-settled” trust, where the grantor personally benefits from the income. The main objectives are to provide protection from creditors and retain control over the assets. Accordingly, DAPTs may be used when there’s a divorce or spendthrift concerns.

Currently, 20 states have enacted legislation authorizing DAPTs. They are: Alabama, Alaska, Connecticut, Delaware, Hawaii, Indiana, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming.

Finally, offshore trusts can be used to protect assets. These trusts are created in countries that are “tax havens” or have strict privacy laws. Professional guidance for these complex arrangements is recommended.

Focus on Business Matters

Asset protection is also vital to business owners. Depending on your situation, you might form a company as a C corporation to protect your business assets or as an S corporation providing partnership-type taxation. There are additional factors at work, so choose the business form carefully.

Another possibility is a limited liability company (LLC). These essentially combine the tax benefits of S corporations with the creditor protection of C corporations. LLCs may also offer more flexibility in management of assets. Again, all factors should be considered before you switch to LLC status.

Choosing the Right Asset Strategy

The good news is that there are a multitude of ways to protect your assets, thus allowing you to be able to pass more on to your heirs. The key is to be proactive, not reactive. Contact us to determine which strategies work best with your estate plan.

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