How to Protect Your Assets from Creditors in Estate Planning
Many people do not realize that estate planning isn’t just about providing for your loved ones after you’re gone, but also about ensuring that all of you do not face potential legal issues when it comes to creditors and others seeking your assets. This is especially important during an economic crisis like the one we are currently in, when governments are cracking down on profits made off of investments and some individuals and/or businesses will inevitably be filing for bankruptcy, which can have implications for those they have provided funds to. Ultimately, creditors have the ability to challenge certain estate planning structures as fraudulent transfers under the law if the case can be made that you made a transfer with the intent to defraud a creditor, without receiving the equivalent value in exchange for the transfer, or you were insolvent as a result of the transfer. The laws then void the transfer, and even a future creditor who you had no relationship with can attach your assets as a result.
This is why it is crucial that you and your attorney ensure that you receive reasonably equivalent consideration for any transfer of assets that you make. In estate planning, the following is considered to provide for reasonably equivalent consideration:
- Funding a protective trust at death that provides for children or a spouse;
- A transfer that exchanges for an annuity or similar interest, which protects the principal from creditors; or
- A transfer in return for interest in an LLP or LLC.
Funding A Protective Trust
In this case, the asset protection provisions for trusts include the following:
- Combining a number of beneficiaries’ interest in distributions;
- Discretionary powers for an independent trustee concerning distributions to one or more beneficiaries;
- Limiting distributions to education, health, maintenance, and support of beneficiaries
- Limitations on the use of real or tangible property to personal use;
- Allowing for the state that governs the trust to be changed to a more favorable state; and
- A Spendthrift Clause.
Annuities, Split Interest Trusts, & Charitable Deductions
This system works similarly to annuities sold by insurance companies except that they are private and involve exchanging assets (in exchange) for the right to receive payments over time. In doing so, they protect the principal against attachment.
Another option are split interest trusts, such as the Grantor Retained Annuity Trust (GRAT) , whereby you can gift assets in exchange for the right to receive payments. This can be a fixed amount (the GRAT) or variable, which is based on the value of the assets in the trust, and known as Grantor Retained Unitrust. For some types of property and beneficiaries, you also have the option of keeping the income from the assets via a Grantor Retained Income Trust.
Charitable Remainder Trusts are yet another option, whereby you can make a gift to a charity using a trust and keep an annuity, with the remainder of the assets going to the charity.
Limited Liability Companies (LLCs)
LLCs are another method of keeping assets from creditors because creditors have limited ways of getting at assets that have been transferred into them. This is because there is less justification for transparency than, for example, a corporation. However, it is crucial that, if you pursue this strategy, you treat the LLC as a business instead of personal property, otherwise the court will also treat it as personal property.
Contact Our Florida Estate Planning Attorneys to Find Out More
Contact our experienced Orlando estate planning attorneys at Gierach and Gierach, P.A. today to find out how to best maximize your asset protection depending upon your circumstances and goals.