Asset protection, estate planning: wealth-saving bedfellows

How and when should your asset protection plan be done? The when is easy: when you do your estate plan, do a lifetime plan at the same time.

The typical reader of this column hates paying taxes. Beating up the IRS — legally — is often their favorite indoor sport.

What tax do they fear the most? Hands down it's the estate tax monster. To calm your fear, let's start with a bit of good news: Your author, with the help of other experts, has learned how to win the estate tax game. What does this mean? We have developed a system — used hundreds of times over the years — that can, does and will beat the estate tax monster every time, no matter how large your estate.

But face it, even a perfect estate plan, at best, is in reality a death plan because nothing happens until you die. Then, and only then, will your assets go to your heirs (or into a trust, partnership or other entity for their benefit).

All very good, but wait, you aren't dead yet. In the meantime are your assets protected? Let's take a closer look at your situation: Write your age here ____________ (and if married, your spouse's age here ____________). If you are a guy, and you wrote 41, you life expectancy is 77; at 52 it’s 78; at 63 it’s 81; at 74 it’s 84. Hey, even at age 86 you have 5 more years to enjoy life. Oh, you're a gal, add 3 to 4 years.

What's my point? Well, your death plan should protect your assets from the IRS when you go to heaven. But what about protecting your assets from today (the day you sign your estate planning documents) until the day you go to that better place?

Sorry, but here comes the bad news. To be brutally honest, the reason almost all estate planning advisors don’t do asset protection is because they don't know how. What about those advisors that rely on a software package? They are helpless: asset protection is not part of the package.

Just imagine going to the bank with a large amount of cash. Only a fool would not take the necessary precautions. In a like manner, it only makes good sense to protect your assets, starting today and until you go to the big business in the sky.

How and when should your asset protection plan be done? The when is easy: when you do your estate plan, do a lifetime plan at the same time. Your lifetime plan must include your asset protection plan.

Your lifetime plan includes such considerations as how to maintain your lifestyle (and your spouse's, if married) for the rest of your life; how to deal with inflation; succession planning for your business; what if one of your kids gets divorced; and a host of other issues unique to every family and business owner.

Next, the how of asset protection: for most law-abiding Americans, asset protection is a three category subject: protect you and your spouse; protect your kids and grandkids; and protect your business.

Before detailing the categories it is important to understand the goal of asset protection: to protect assets from possible lawsuits (even if you lose and are held liable), creditors, divorce claims and frivolous claims.

The following is a list of the basic dos, don’ts and strategies to make sure your assets are protected.

Protecting you, your spouse
1. Your residence(s): Transfer to a "qualified personal residences trust" or hold title 50% in your revocable (estate planning) trust, and 50% in your spouse's trust.

2. Other real estate you own: Each property (whether vacant or improved) should be in a separate LLC. However, properties that are not too valuable can be grouped in one LLC.

3. Investments: Transfer investments (cash, stocks, bonds, CDs and the like, as well as your interests in the LLCs in No. 2 above) to a family limited partnership (FLIP).

4. Always carry umbrella liability insurance.

5. Never serve on the board of directors (profit or not-for-profit) without adequate error and omissions insurance.

6. Do not co-sign or guarantee loans for friends or family. (Your kids or grandkids could be an exception.)

7. Cars can be an expensive asset destroyer. Don't own the car of an adult child. Don't own vehicles jointly with your spouse. Don't let other people drive your car unless your insurance has proper coverage.

8. Getting married? A prenuptial agreement is a must.

9. You and your spouse must execute property powers of attorney.

Protecting kids, grandkids
1. Never leave property, including life insurance proceeds or retirement plan funds, directly to a minor … always in trust, to a FLIP or some other protection device.

2. Beware of the divorce devil. Never have your kids own life insurance policies on your life (or second-to-die). If your kids or other family members own stock in your closely held business, make sure you have a unit buy/sell agreement to be certain the business stays in the family. Give the kids limited (non-voting) units in the FLIP, which is a perfect asset protection device, locking out an ex-spouse. If you live in a community property state (like Texas, California or Louisiana), remember that gifts and inherited property are not in the community (spouse has no ownership). In all other states, gifts and inherited property (and property owned prior to marriage) are non-marital property (spouse has no claim). Never comingle non-community property with community property or non-marital property with marital property.

3. Sometimes kids must be protected from themselves. If a minor (or maybe even an adult) is a spendthrift, on drugs, has special needs, or other problems, set up an appropriate trust.

Protecting your business
1. Don't operate your business as a sole proprietorship or as a general partnership … incorporate your business.

2. Keep your corporation thin. A thin corporation is not a good target for a lawyer going after big bucks. Only have the corporation own those assets that are absolutely necessary to operate: cash (distribute excess cash if an S corporation), inventory and accounts receivable. Here's the drumbeat:

  1. The following should be owned by separate LLCs and leased to the corporation: Land that the business uses to operate (it's okay to leave the building in the company as a leasehold improvement); expensive equipment, furnishings and signage; and vehicles (most lawsuits against businesses are the result of vehicle accidents). The company should not use its cash to make investments, own artwork or own any other non-business asset.
  2. If you are a C corporation, become an S corporation so you can make distributions (dividends) without being double taxed.

3. Your corporation should never own life insurance on any of the stockholders … proceeds open to creditor claims.

4. Opening a new location or diversifying with a new product or service? Then start a new corporation.

Please note that the above list does not cover all of the situations that require asset protection. Nor does the list include every do, don't or strategy that a competent advisor might use.

Let's sum all this up: Your death plan should be designed to protect your wealth from the IRS. Your estate plan — no matter how perfect — is not done unless it includes a lifetime plan (from today to the day the grim reaper gets you). Asset protection is an essential part of your lifetime plan designed to protect your wealth from any third party or court that tries to take away any part of your wealth.

When you work with an experienced advisor, asset protection (as a part of your estate plan) is easy, quick and best of all, inexpensive.

Irv Blackman, CPA and lawyer, is a retired founding partner of Blackman Kallick Bartelstein LLP and chairman emeritus of the New Century Bank, both in Chicago. He can be reached at 847-674-5295, e-mail [email protected], or on the Web at WWW.TAXSECRETSOFTHEWEALTHY.COM.

TAGS: Taxes