I strive to write blogs that hit on the most frequent areas my clients inquire about in the first meeting. One of the most common, if not the most common, comments from clients in the first meeting is “we just want make sure things are protected”, “how can I protect what I have?”, or something along those general lines. These are, of course, very general comments so the natural next step is to find out exactly what the client means in order to begin formulating specific estate planning goals. In prior blogs, I have focused on long-term care expenses as the biggest threat to the savings of the 99%. With the unified gift and estate tax exclusion currently at $12,920,000, the average client’s wealth is not at risk of estate taxation. Although long-term care planning is a frequent topic of discussion in the asset protection arena, there is much more breadth to asset protection in estate planning. For example, clients in their 30s, 40s and even 50s may not yet be concerned with age-based long-term care planning. For younger clients, asset protection concerns are often tied to involvement in a small business, ownership of rental properties, or worries about a catastrophic medical diagnosis. Lawsuits, bankruptcy, and catastrophic medical expenses can affect clients of any age. In this blog, instead of focusing on asset protection with respect to long-term care and Medicaid, I will discuss asset protection in more general terms.
When younger clients ask about asset protection, the general seminar from me is how there are methods by which to protect assets; however, it is critical to realize that you cannot have it both ways. In other words, most truly effective forms of asset protection in N.C. come with negative consequences as far as your beneficial use and enjoyment of the assets you wish to protect.
One of the simplest forms of asset protection is purchasing an umbrella liability insurance policy. An umbrella policy provides additional coverage when your primary insurance is exhausted which can be that of general liability, auto, home, professional, landlord and various other types of insurance. The obvious issue is that umbrella policies have coverage gaps and monetary caps. In general, relying solely on umbrella insurance for asset protection is unwise.
Another well-known form of asset protection is the use of an LLC, corporation or other registered entity to shield from personal liability. An individual owner is not liable for the debts of or judgments against their limited liability company or corporation. However, this asset protection strategy is flawed as well because the assets owned by the LLC or other entity are subject to the debts and judgments of such LLC or entity. For example, if an LLC owning rental property and a bank account where rent is deposited is sued, although the personal home or other assets titled to the individual owner of the LLC are not subject to a judgment against the LLC, the rental property and the funds in the bank account owned by the LLC are subject. Additionally, in certain circumstances, and especially in cases where an LLC is undercapitalized (the individual owner frequently removes funds from the LLC) a creditor or claimant could be allowed by a Court to “pierce the corporate veil” and attach to the personal assets of the owner.
While an umbrella insurance policy and creation of entities are pieces of an asset protection plan, both are flawed and can be outright ineffective. Additional and more effective components for asset protection may lie in certain types of joint tenancy and irrevocable trusts, which are discussed in part 2.