Trying to plan your North Carolina estate? Get the answers you need to protect your family.
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Why Should I Consider Asset Protection Planning?
It’s a sad fact of life and business that one day you, your spouse or child might be faced with a lawsuit or financial catastrophe, such as:
- An automobile accident with an uninsured or underinsured motorist
- Causing an automobile accident with damages beyond the limits of your own automobile insurance policy
- Lawsuit resulting from damage or injury taking place at your home or on your property
- Lawsuit from an disgruntled employee or business partner
- Professional malpractice allegations
- Health crisis (did you know that medical bills are the number one cause of bankruptcy?)
Asset protection can help to:
- Have peace of mind that you and your family are protected
- Reduce or avoid probate and estate taxes
- Reduce your exposure to malpractice claims
- Potentially save money on liability and malpractice insurance if less coverage is needed
- Settle lawsuits more quickly and at reduced amounts—once a plaintiff realizes your assets are protected, they’ll be less inclined to incur any more legal costs knowing that their likelihood of recovery is slim
- Protect against exemplary, treble, or punitive damages which typically are not covered by liability insurance policies
- Protect against the bankruptcy of your insurance carrier—there’s no guarantee that they’re still going to be in business when you need them
Just because someone is careful or competent does not mean that he or she will never be sued or subject to a malpractice claim. We live in a very litigious society and juries like to blame professionals or business owners because they are perceived to have the wealth and/or insurance to pay damages. And unfortunately, even frivolous claims can cost a significant amount in lost time and legal fees. The more barriers you can have in place, the more likely the claim will be dropped faster or never initiated at all.
What is Asset Protection Planning?
At its most basic, asset protection planning is about using different strategies and tools to protect and preserve your property and wealth from taxes, lawsuits, creditors and other risks. For others, asset protection planning might also include protecting it from the constantly increases costs of nursing home and long term care.
Asset protection planning could be something you undertake for yourself or it could be something you set up for your surviving spouse and children. Many parents choose to leave the assets to their children asset protection trusts that protect the children’s inheritance from the child’s lawsuits, creditors, divorce and/or bankruptcy. For example, first let’s assume you leave $500,000 to your child outright via a will. A year or two after receiving the inheritance, your child’s spouse files for divorce and claims $250,000 in the divorce settlement. Now, let’s assume instead of leaving the $500,000 to your child outright, you instead left it in an asset protection trust for your child. A year later when your child’s spouse files for divorce, he or she cannot make a claim to the assets in the trust.
Doesn't a revocable living trust provide asset protection while I’m still alive?
No, a revocable living trust does not provide asset protection while you are living. The general rule of thumb from the world of debtor-creditor law is whatever you have direct access to, your debtors and creditors have access to. This means that the assets owned by the revocable living trust while you are alive are still subject to your persona liabilities include lawsuits, bankruptcy and loan or mortgage defaults.
Is asset protection planning aimed at eliminating legitimate debts?
No, absolutely not. If you owe someone a legitimate debt, asset protection planning is not going to remove your obligation to pay the debt. In particular, if you intentionally incurred a debt or obligation and then placed your asset in a trust or some other asset protection vehicle, this will be deemed a fraudulent transfer and the law will not protect you.
If I have an umbrella insurance policy or my employer or business provides Errors & Omission (E&O) insurance or Directors & Officers (D&O) Liability Insurance, do I need to be concerned about liability and asset protection planning?
Yes. Umbrella insurance is a great place to start, but unfortunately it doesn’t cover everything. A colleague once shared a story about a consultant that specialized in liability insurance. He would be called into major corporations to review their liability insurance and he regular reviews umbrella policies. On a regular basis, he would find pages of issues or matters not covered by the insurance policies. Thus, we still recommend asset protection planning, but consider the insurance your first line of defense.
I have malpractice insurance, do I need to be concerned with liability and asset protection planning?
Yes. For professionals that carry the possibility of malpractice claims, such as doctors, dentists, lawyers, accountants. For such professions, malpractice is a personal liability—meaning that operating through a business entity such as a corporation nor limited liability company will not protect you from the claim. This means that if you are sued for malpractice and either you don’t have malpractice insurance or it doesn’t include enough coverage to fully cover the claim, your personal assets will be at risk to the malpractice claim.
If I have a corporation or limited liability company (LLC), do I need to be concerned about asset protection and liability?
Yes. Many business owners are told to form a corporation or limited liability company (LLC) for asset protection or liability protection purposes and this is a good place to start, but it’s important to understand the limits of the liability protection provided. There are essentially two types of liability that need to be considered: “inside liability” and “outside liability.”
Inside liability refers to liability as a result of business operations—such as disgruntled customers, vendors or employees. Perhaps you own a construction company and someone becomes injured on the job, or you own an plumbing business and one of your employees caused an accident in the company van.
If the business entity is properly structured and maintained (note that this is an important step that many small business owners neglect), then the business entity will shield the business owners personal assets and home from lawsuits resulting from inside liability, with the exception of certain special forms of liability such as malpractice liability. This means that if the business is sued, typically only the business assets will be at risk to the lawsuit.
Outside liability is liability resulting from your personal life. Perhaps you cause a severe car accident, someone is injured on your property, or some other catastrophe. The person bringing the lawsuit can’t directly take business assets, BUT they can try to claim your ownership in the business—i.e., your stock or ownership interest in the corporation or limited liability company.
Thus, many business owners or professionals that are at risk of malpractice exposure, such as doctors, dentists, lawyers and accountants, may want to undertake asset protection planning for their personal assets to create further separation between their personal assets and business assets. Similarly, it can be prudent to separate higher risk assets, such as automobiles and rental real estate, from other assets and property.
In our office, we call this “bubbles and boxes.” The bubbles representing business entities and the boxes representing trusts. Depending on the asset mix and risks, we may recommend some combination of one or more bubbles and boxes to achieve maximum separation of assets.
Why is planning advance so important and what are fraudulent conveyances?
Think of asset protection planning like buying car insurance. If you haven’t bought insurance yet and you wreck your car, you’re out of luck. You can’t buy insurance after the fact. Similarly, if you attempt asset protection planning after a known event, it’s highly likely that a court of law is going to consider this a fraudulent conveyance that was undertaken in contemplation of a lawsuit.
Why might adding my children to my assets or accounts increase my risk to lawsuits and creditors?
Many people believe that an ‘easy’ way to avoid probate or to enable their children to assist them as they get older is to add their child to their bank accounts or even to the deed to their home. In our office, this is what we call the ‘coffee shop’ and ‘beauty parlor’ law. You heard from a friend, who’s neighbor’s non-lawyer brother-in-law said it was a good idea. And while occasionally it might work for some, there are many reasons why this approach is NOT recommended:
- The bank account or real estate is now considered owned jointly by that person and as a result, may be at risk if your child is sued, divorces, or files for bankruptcy. Recently, a colleague of mine shared a story with me about a client that added her daughter to the deed to her home. Her daughter later ran into some health issues, ultimately lost her job and wound up filing for bankruptcy. During the daughter’s bankruptcy proceeding, her mother lost her house because it was deeded in the daughter’s name and therefore was subject to the bankruptcy proceeding. Similarly, let’s say that your child causes a fatal car accident and is being sued. Guess what? If titled jointly, your bank account or real estate might be at risk to the lawsuit!
- Once a child is added to your bank account, he or she can withdraw some or all of the account or can try to sell or mortgage his or her share of the house. Money has a funny influence on people and unfortunately, there are many stories and examples where children have wiped out their parents savings.
- Your child falls on hard times—perhaps a job loss, health crisis, addiction, or some other jeopardy. And while they may never have intended do, sometimes life events happen that might just make this too tempting and the next thing you know, they’ve convinced themselves that you “would have wanted to help them out and won’t mind if they dip in the account a little bit”…and a little more… and a little bit more, until there’s nothing left.
The bottom line is that there are much more effective estate planning tools that can help us avoid or limit your exposure to these situations.
Read even more reasons why it's not a good idea to add children or family members as joint owners on your assets or accounts.
Aren’t certain assets automatically protected from lawsuits and creditors?
Yes. By federal and state laws, certain types of assets and accounts may be all or partially protected. The amount and type of assets that are protected can vary a bit from state to state.
Assets that may be protected:
NOTE: These assets may be protected from lawsuits and creditors, but they are not protected for nursing home and Medicaid planning purposes.
- Real estate owned jointly by husband and wife—referred to as “tenants by the entirety” is afforded protections in certain contexts
- Death benefits from life insurance policies if the beneficiary is a spouse, or a trust for the spouse’s or child’s benefit
- Annuities, if the beneficiary is a spouse, child, or a trust for a spouse’s or child’s benefit
- Retirement plans such as IRAs, 401(k)s, pension plans, profit sharing plans and similar plans
- Asset protection trusts for your benefit established by someone else, such as your parents or grandparents
- Assets held in a limited liability company (LLC), depending upon the context
- Assets held in a family limited partnership (FLP), depending upon the context
- Assets held in certain types of asset protection trusts established by you for your own benefit
Assets that are NOT protected:
- Real estate only in your name
- Real estate owned jointly with someone other than your spouse
- Cash value and death benefits from life insurance policies if the beneficiary is your estate or someone other than your spouse, a child, or a trust for your spouse’s or child’s benefit
- Stocks, bonds and brokerage investment accounts
- Cash, Certificates of Deposit (CDs), checking accounts, savings accounts, money market accounts
- Monies owed to you (such as notes receivable or mortgages receivable)
- Business interests, such as stock or ownership interest in your corporations, partnerships, limited liability company (LLC) or sole proprietorships
- Tangible personal property, such as china, antiques, silver, crystal, jewelry, furniture, appliances, collections and other valuables
- Vehicles, such as cars, trucks, motorcycles, airplanes, boats, all terrain vehicles (ATVs), motor homes, recreational vehicles (RVs) and similar