This is another in a series of blogs on the basics of estate planning. This week, we’ll take another look at asset protection. Next week, we’ll delve even deeper into asset protection.
As we saw in the last blog, much depends upon whose assets you are looking to protect. In last week’s blog, we saw that, if the assets are yours, you have fraudulent transfer considerations, etc., to consider. This week, we’ll look at assets that are coming to you. In other words, these assets were accumulated by someone else and will be given or bequeathed to you. As I mentioned in last week’s blog, typically, those assets can be protected completely. But, those assets need to be left to you in the right way.
For example, let’s say that your mother wants to leave you some assets at her death. You are her only child. She has her house, a bank or brokerage account, and an Individual Retirement Account (“IRA”), all of which she wants you to have. She might be able to leave all these assets directly to you by beneficiary designation. Certainly, the IRA she could do this with. Depending upon the state, it’s likely that she could do this with the real estate and bank or brokerage account, as well. She could give these assets outright to you through intestacy, through a will that goes through probate, or even through a trust. While these methods all might be able to get the assets to you, they will not afford asset protection. None of these assets has inherent asset protection (in most states). While your own IRA could have asset protection characteristics, the U.S. Supreme Court, in Clark v. Rameker, held that an inherited IRA has no such protection, at least under federal law.
However, if each of these assets were left to your share of a trust, (either set up during life or at death) the asset protection wrapper of the trust could protect the asset. In most states, in order for the trust wrapper to have asset protection, the trust needs to be established by and with assets from someone else, needs to be completely discretionary, and needs to have a third-party trustee making those discretionary distributions. Since a beneficiary’s creditors stand in the beneficiary’s shoes, the assets of the beneficiary are only creditor protected if the beneficiary themselves has no right to demand the assets, even under a specified standard. For some, this constraint on access is a bridge too far. They’d rather have enforceable rights in the assets and give up some asset protection. For others, the asset protection is paramount due to their current circumstances or past experiences. In asset protection, often you can achieve many of the things you want, but not all of them.
Next week, we’ll delve deeper into asset protection. In upcoming blogs, I’ll discuss more on the basics of estate planning.
Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128