One of the primary strategies for protecting real estate for long-term care and Medicaid purposes involves a special kind of deed converting the real estate to a non-countable asset while also making it non-recoverable from the Medicaid estate recovery laws. Although generally used for Medicaid planning, I often inform clients that, in the event they never need long-term care or to apply for Medicaid, the deed provides a multitude of other benefits including general asset protection and probate avoidance. While changing the character of real estate ownership does not exempt the property from the claims of creditors, it can make it exceedingly difficult for unsecured creditors. For example, there is currently no statutory mechanism for an Executor or Administrator to use real estate that passes via operation of law to pay claims against the estate. Creating multiple roadblocks is just as important to creating dead ends when it comes to asset protection. However, as I alluded to in part 1, many strategies come with more negative consequences than benefits. In this case, conveying an undivided interest in real property to third parties, even adult children, presents problems for a future sale or borrowing against the property as the consent of all owners and their spouses becomes required. Additionally, this strategy is generally only effective against hindering unsecured creditors. Secured creditors, including judgement creditors, are unaffected by deed work. Furthermore, asset protection deeds can sometimes be counterproductive if joint tenants are added who themselves are susceptible to future claims or judgments.
Next, certain types of trusts can protect the assets of the settlor (i.e. creator of the trust). North Carolina does not recognize asset protection trusts as some states do and it is unclear how effective an asset protection trust created by an NC resident under the laws of another state would be in protecting NC property and claims of NC creditors. Additionally, N.C.G.S. § 36C-5-505 provides that property in a revocable trust is subject to the claims against the settlor and, if the trust is irrevocable, a creditor of the settlor can reach the maximum amount that can be distributed for the settlor’s benefit.
Nevertheless, although drastic, this does not prevent North Carolinians from creating a trust to protect their assets by foregoing any beneficial interest in the trust assets. A settlor can create a trust that specifically provides the settlor, their estate and the creditors of their estate are not, and cannot be made, a beneficiary. Accordingly, clients must understand that they will not have access to the assets placed in a trust for effective asset protection in NC. This is usually a hard sale especially for younger clients, but there are ways to make it work. First, there is no prohibition against the settlor serving as a fiduciary of a trust of which they have no beneficial interest, although it is wise to have provisions for an independent trustee to step in under certain circumstances. Therefore, the settlor can still control investment decisions and discretionary distributions to beneficiaries. Additionally, a settlor can retain a limited power of appointment whereby the can change the beneficiary so long as the settlor, their estate or the creditors of their estate not be made beneficiary. The importance of this device is leverage. If the settlor is not a beneficiary and cannot be a beneficiary, in a catastrophic situation, the settlor may be relying on a beneficiary to return a distribution from the trust to the settlor when there is no legal obligation for such beneficiary to do so. Therefore, a limited power of appointment creates leverage to indirectly access the trust assets in certain circumstances. It should be noted that a settlor who is the trustee or retains a limited power of appointment over an irrevocable trust, even if they are not the beneficiary, does not remove the trust assets from the taxable estate of the settlor because such rights are viewed by the IRS as “incidents of ownership.” Another key element to making this type of trust work for a client is that a trust can always pay the expenses of the trust including the expenses of the property the trust owns. Therefore, the trust can pay the insurance, taxes, and general maintenance associated with real estate it owns which can relieve the settlor of many expenses they would ordinarily be personally obligated.
Lastly, it should also be noted that while protecting assets for clients is extremely difficult in North Carolina, protecting assets for their heirs can be much easier. Chapter 36C, Article 5, of the North Carolina General Statutes does recognize spendthrift provisions as well as discretionary and protective trusts as it pertains to non-settlors. Accordingly, if a client establishes a revocable living trust, although it provides no protection from their creditors, it can provide immense protection for their heirs when it becomes irrevocable at the death of the client settlor. A well drafted spendthrift provision can be a near full proof plan for potential heirs who may be in bankruptcy, a divorce proceeding, receiving governmental benefits or otherwise dealing with creditor issues at the time their Mom, Dad or other benefactor passes away leaving the heir an inheritance.
One final caveat, however, is that asset protection is rarely an impenetrable shield due to the Uniform Voidable Transactions Act codified in North Carolina in Chapter 39, Article 3A. In other words, creditors, even future creditors, can always assert that transfers to trusts or otherwise are voidable if they can show an intent to hinder, delay, or defraud the creditor. When asset protection is combined with an overall estate plan containing other estate planning purposes and established well in advance of any potential claims or creditors, it is much more likely to be effective.