How Can I Protect Assets from Creditors?

Estate planning is not just about saving taxes, it is also about managing and protecting your assets against future creditors, both for you and for your beneficiaries.

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Protect assets

Forbes’ recent article entitled “Three Estate Planning Techniques That Protect Your Assets From Creditors” explains that the key to knowing if your assets might be susceptible to attachment in litigation is the fraudulent conveyance laws. These laws make a transfer void, if there’s explicit or constructive fraud during the transfer. Explicit fraud is when you know that it is likely an existing creditor will try to attach your assets. Constructive fraud is when you transfer an asset, without receiving reasonably equivalent consideration. Since these laws void the transfer, a future creditor can attach your assets.  Just as important is the concept of protecting your assets when they become an inheritance for your loved ones.  When assets pass from you to them, it is impossible to know if your loved ones will be in a difficult spot.  Imagine for a moment that all of your hard-earned assets pass to a loved one, but that person is in the midst of a divorce, or suffered an incapacitating illness or injury.  Many clients in the Cape Cod and Plymouth areas attempt to protect their assets with home-spun approaches that are often not effective.

When considering strategies to protect assets, getting reasonably equivalent consideration for a transfer of assets will eliminate the transfer being treated as constructive fraud. Reasonably equivalent consideration includes:

  • Funding a protective trust at death to provide for your spouse or children
  • Asset transfer in return for interest in an LLC or LLP; or
  • A transfer that exchanges for an annuity (or other interest) that protects the principal from claims of creditors.

Limited Liability Companies (LLCs) can be used to protect assets, but care must be taken to organize it properly.  When assets are transferred into the LLC, your creditors have limited rights to get their hands on them. Like a corporation, your interest in the LLC can be attached. However, you can place restrictions on the sale or transfer of interests that can decrease its value and define the term by which sale proceeds must be paid out. An LLC must conduct business and be operated as such for courts to treat them as a business. Thus, if you use the LLC as if it were your personal property, courts will disregard the LLC and treat it as personal property.  When organizing LLCs, consider other advantages that can connect to your estate plan.  For instance, consider having the member shares owned by your family Trust, or, ask your legal counsel to describe the benefits of establishing the business outside of Massachusetts if other venues carry better protections

Along with a trust where you make a gift to an individual, you can protect the trust assets and get a charitable deduction, if you make a gift to charity through trusts. There are two types of trust for this purpose: a Charitable Remainder Trust (CRT) lets you keep an annuity or a variable payment annually, with the remainder of the trust assets going to charity at the end of the term; and a Charitable Lead Trust (CLT) where you give a fixed of variable annuity to charity for a term and the remainder either back to you or to others.

Asset protection is a complex field and is certainly not a do-it-yourself endeavor.  No matter the approach you take to mitigate risk, never risk converting a potential civil liability into a much more serious criminal act.  Obtaining proper legal counsel is essential before deciding on a course of action.

Reference: Forbes (June 25, 2020) “Three Estate Planning Techniques That Protect Your Assets From Creditors”

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