Articles Posted in Asset Protection

In the past, creditor protection was afforded to your IRA and to the beneficiaries that would inherit your IRA, such as your children.  However, in June of 2014, the United States Supreme Court ruled that an “Inherited IRA” is not protected from creditors of the beneficiaries.

This major change in the exempt status of the Inherited IRA, motivated estate planners  to examine new ways to protect these retirement assets from creditors.

The need to restore creditor protection while maintaining the favorable tax treatment of IRAs has led many clients to consider adding a stand alone Retirement Trust to their estate plan.  If drafted properly, this type of trust can protect Inherited IRA accounts from creditors, including a beneficiary’s divorcing spouse.

A Special Needs Trust (“SNT”) or Supplemental Needs Trust is a certain type of trust which can be used for goods and services that governmental programs will not cover.  The SNT must have special language within the trust such as: “This trust shall be used to supplement and not supplant governmental programs”.  Having such necessary language, the assets in the trust are not counted against the special needs beneficiary as an asset in determining eligibility for governmental programs such as Medicaid and Supplemental Security Income (SSI).

There are two types of SNTs.  The First Party SNT is funded with the special needs person’s own funds.  For instance, if a person with a disability is awarded monies from a settlement from an auto -mobile accident, those funds can be placed in a First Party SNT to preserve the eligibility for SSI and/or Medicaid.  The same process can be used for when a special needs person inherits a sum of money outright.

There is one disadvantage with the First Party SNT.  When the beneficiary dies, Medicaid will send a bill to the Trust for the monies spent by that program during her life.  The trust must pay back Medicaid the amount of the bill. However, if the trust assets are less than the Medicaid charge, Medicaid will absorb the balance of its bill.  If there is a balance after paying the Medicaid bill, the proceeds may be distributed to family or anyone who is a distributee of the Trust.

When clients think about Asset Protection Off-shore trusts or some elaborate scheme of trusts and other entities usually come to mind.  However, there are several vehicles that are less complicated that a client can use that will probably suffice for her protection.

Here are some strategies that are not complicated and relatively easy to implement:

  1.  Purchase an Umbrella policy in addition to a Homeowners policy for your home.  An Umbrella policy is very inexpensive and will protect you for claims that exceed other policies for your home and auto.

In general, IRAs, 401(k)s and pensions are exempt from the account owner’s creditors under Illinois law. They cannot be seized or garnished by creditors. In an article by Bruce E. Bell, Protecting Retirement Plan Assets from Creditors, he points out that assets passing to beneficiaries of the deceased plan owner are also in many cases exempt from claims of creditors. Exceptions include divorcing spouses, child support obligations and some Federal tax obligations.

Regarding bankruptcy, IRAs are exempt subject to a statutory cap which is currently $1,283,025. IRA owners can avoid this cap by creating a trust to hold the owner’s retirement assets at the owner’s death. With this trust in place, the beneficiaries of the IRA owner are protected in the event a beneficiary declares bankruptcy.

It is important not to comingle conventional IRA assets with funds rolled over from qualified retirement plans. The qualified retirement plan funds should be rolled into a separate IRA containing only funds which originated from qualified retirement plans. This segregating will allow all qualified retirement plan funds to be exempt from bankruptcy. Continue reading

If you die without a Will or Trust, your assets will be divided up based on the intestacy laws of the state where you live at the time of your death and the intestacy laws of any other state where you own assets.

Many times the intestacy laws will give different results from what you would have wanted had you taken the time to make a Will or Trust. If you own assets located outside of your home state, you could have two different sets of beneficiaries of your assets.

For example, in Florida and in Virginia, if you are survived by a spouse and children from the marriage, your spouse will inherit 100% and your children will receive nothing.

Use the same set of facts, except that your children are from a different spouse. In Florida, your current spouse will inherit one-half and your children will share equally in the remaining one-half, while in Virginia your current spouse will inherit one-third and you children will share equally in the remaining two-thirds.

Take that same set of facts in Illinois, and if you are survived by a spouse and children, no matter which spouse (current or former) the children are from, your current spouse will inherit one-half of your assets and your child (or children) will inherit the other half.

The examples illustrate what a difference state intestacy laws can make. The only way to insure that after your death your assets will go to the beneficiaries of your choice and will be distributed by the person you want making the distributions at the time you want your beneficiaries to receive them is to make an estate plan which includes a Will or a Trust.

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Illinois laws provide asset protection for homes and life insurance policies.

The protection provided to a home, whether it is a house, a condominium or other form of primary residence, is $15,000 per individual.

The protection provided for life insurance policies equals the value of the policy as long as the proceeds payable because of death go to the wife or husband of the insured, a child, parent or other person dependent upon the insured.

These laws apply to everyone and no action is needed to take advantage of their protection.

Additional steps can be taken to protect other assets from the claims of creditors. These steps include establishing trusts and other entities which hold title to the assets. When properly created, the owner of the property can enjoy the benefits of the property without the worry that the property may be attached by a creditor.

Another step to protect assets from creditors is to retitle the asset. By doing this, the retitled asset is now in the name of a different individual and a creditor cannot reach the asset. Often an individual who uses this method already had the intent to pass the property to the other party, usually a family member, at some time in the future.
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In his article, When is it Too Late for Asset Protection?, Attorney Robert Mintz discusses the pitfalls of asset protection planning.

He points out that states, including Illinois, have fraudulent transfer laws. These laws prohibit an individual from transferring property to another entity to “hinder, delay or defraud” someone owed a debt in order to avoid paying that debt. As a result of these laws, there is little one can do to protect assets against a claim that has already been made, sometimes referred to as an “existing claim”.

Where asset protection planning is allowable and is effective is in the situation where an individual seeks to protect himself from unseen future risks. Mr. Mintz gives the following example in his article: ” . . . say you set up an asset protection plan and a negligent act involving a patient occurs several months later. Fraudulent transfer is not an issue in this case because the property transfer was unrelated to the claim subsequently developed by this patient. Presumably, at the time you implemented your asset protection plan, you did not know or intend that the patient would be injured. Similarly, loans and contracts entered into after establishing a plan, as long as the creditor is not misled, are also outside the scope of the fraudulent transfer rules.”.

Illinois law is clear that the fraudulent transfer laws can overturn an asset protection plan where the intent of the plan was to avoid paying an existing claim. It is also clear that in Illinois asset protection planning to protect against unforeseen future risks is allowed and is effective. The tricky part comes in when one is confronted with the situation where one must prove to a court that the transfers involved fall into this second, acceptable area of planning.
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Asset protection for a business can be straight forward and a relatively simple matter to implement. At the same time, it can protect a large chunk of the assets of a business.

For example, in the case of a company that runs a manufacturing business, the usual business structure is for the manufacturing company to be organized as a corporation. That is fine as far as it goes.

But if a second corporation were to be formed as a trucking corporation, all of the assets the manufacturing corporation has in the fleet of fifty trucks could be transferred to the trucking corporation. As long as this trucking corporation is fully capitalized and fully insured, the effect of creating the trucking corporation would be to remove all of the other assets of the manufacturing corporation from exposure to a judgment regarding an accident involving one of the fifty trucks in the shipping fleet.

This protection could be taken a step further by creating a third corporation which leases the trucks. With a fully capitalized and fully insured leasing corporation in existence, the capital tied up in the fifty trucks owned by the trucking corporation could be protected from judgment in the event that a truck driver employed by the leasing corporation were involved in an accident.

Thus, layers upon layers of protection can be added to accommodate whatever the needs of the business are. The only limitation is the bookkeeping involved with keeping the corporations’ assets separate and keeping the corporations fully insured. As long as the owner of the business is able to keep up with the bookkeeping aspects of the arrangements, the protection afforded by this type of asset protection planning is substantial and completely within what the law allows.
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You do not have to sell your home in order to qualify for Medicaid coverage of nursing home care in Illinois; however the state can file a claim against your house after you die.

You can freely transfer your home to the following individuals without incurring a transfer penalty which will make you ineligible for Medicaid for a period of time. Those individuals are:
• Your spouse • A child who is under age 21 or who is blind or disabled • Into a trust for the sole benefit of a disabled individual under age 65 (even if the trust is for the benefit of the Medicaid applicant, under certain circumstances)
• A sibling who has lived in the home during the year preceding the applicant’s institutionalization and who already holds an equity interest in the home • A “caretaker child”, who is defined as a child of the applicant who lived in the house for at least two years prior to the applicant’s institutionalization and who during the period provided care that allowed the applicant to avoid a nursing home stay.

Medicaid can put a lien on your house for the amount of money spent on your care. If the property is sold while you are still living, you would have to satisfy the lien by paying back the state. The exception to this rule is the case where a spouse, a disabled or blind child, a child under age 21 or a sibling with an equity interest in the house is living there.
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Asset protection planning is about protecting your assets from creditors – and it is not just for the super-wealthy.

Anyone can get sued. Lawsuits can stem from car accidents, credit card debt, bank foreclosures or unhappy customers. If someone wins a monetary judgment against you, your family could become bankrupt trying to pay it off. To keep your assets away from creditors, you need to move them somewhere creditors cannot reach them. Asset protection techniques include maximizing contributions to IRAs, moving funds to an irrevocable trust, retitling various assets or using limited liability companies or family limited partnerships.

It is important to note that asset protection planning only works if you act before you are sued. Under the law, you may not defraud current creditors. If you are already being sued or if you know you are going to be sued and you transfer assets so that creditors cannot reach them, the court will reverse the transfer. That is why it is a good idea to put a plan into place now.
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