Levels Of North Carolina Asset Protection Planning: Moderate Asset Protection Planning

Jackie Bedard
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Attorney, Author, and Founder of Carolina Family Estate Planning

In establishing a well-designed Asset Protection Plan, once we have reviewed your current assets and degree of exposure and implemented Foundational Asset Protection Planning techniques, the next layer of asset protection planning often involves the introduction of various legal entities such as trusts or business entities for greater asset protection.

Modern Asset Protection Trusts

Many people are under the impression that Asset Protection Trusts are only for the rich and famous and involve complex, off-shore trust havens. But the reality is, modern asset protection trusts are more flexible than ever and are a popular tool for many North Carolina residents. Asset Protection Trusts come in a variety of forms. In some instances, more than one Asset Protection Trust may be appropriate for different goals and greater protection.

 Modern Asset Protection Trusts may include:

  • Family Protection Trusts established by you for the benefit of your family;
  • Family Protection Trusts established by your parents or other relatives to transfer assets to you so that they are protected from your potential lawsuits, creditors or divorce (sometimes referred to as “spendthrift trusts”);
  • Stretch-out Protection Trusts to protect inherited retirement plans and IRAs (sometimes referred to as “Retirement Plan Trusts” or “IRA Trusts”);
  • Spousal Lifetime Access Trusts (SLATs) established for the benefit of your spouse during your spouse’s lifetime giving you indirect access to the assets through your spouse, so long as you continue to be married to one another. If your spouse dies, assets then pass to a new trust that is available for your use but also protected from your lawsuits and creditors.

Limited Liability Companies (LLCs) and Other Business Entities

For those operating a business, professional practice, or owning investment or rental properties, limited liability companies (LLCs) or other business entities may be an important part of a well-designed Asset Protection Plan.

For example, when structured correctly, your investment property or rental property can be transferred to an LLC. If someone is injured on the property, the owner of the property (i.e., the LLC) is sued. The injured party can only pursue the assets of the LLC (i.e., the rental property). This keeps your other personal assets protected from the lawsuit.

Conversely, what if you are sued personally, for example, you cause a serious car accident? The injured party cannot directly go after the assets of the LLC. Under North Carolina law, the injured party can only obtain a “charging order” entitling them to claim any distributions made to you by the LLC. However, as an owner of the LLC, you likely have the ability to control distributions. Furthermore, wages paid to you by the LLC are not considered “distributions” subject to a charging order.

Business Succession Planning and Exit Strategy Planning

One of the most vulnerable times for the value of a business is upon the death or disability of an owner. A well-designed business succession and exit strategy plan should address:

  • What happens if an owner becomes disabled and is no longer able to work in the business?
  • What happens if an owner goes through a divorce?
  • What happens if an owner retires from the business?
  • What happens to an owner’s interest in the business when the owner dies?

Tax Planning and Tax-Reduction Trusts

For some, asset protection planning might also include tax planning and trusts designed for the purpose of reducing or eliminating income, capital gains, or estate taxes. These come in a variety of forms, and often involve more legal jargon and acronyms, including but not limited to:

  • Grantor Retained Annuity Trusts (GRATs) and Grantor Retained Unitrusts (GRUTs) are generally used for estate tax purposes when there are highly appreciating assets;
  • Qualified Terminable Interest Property (QTIP) and Credit Shelter Trusts are frequently used in second marriages to maximum both spouse’s estate tax exemptions (e.g., the amount that you can pass free of estate taxes);
  • Irrevocable Life Insurance Trusts (ILIT) remove life insurance proceeds from your taxable estate.
  • Qualified Personal Residence Trusts (QPRT) may be used to transfer a highly-appreciated residence to family members;
  • Charitable Remainder Trusts (CRT) allow one to transfer a highly appreciated asset to a trust whereby you or a named beneficiary will receive income from the trust for a specified period of time such as your lifetime or a specific number of years after which the remaining value of the trust is donated to a charity that you selected. You may receive a charitable deduction when the trust is established and avoid incurring capital gains tax when the highly appreciated asset is sold.
  • Charitable Lead Trusts (CLT) are similar to a Charitable Remainder Trust but reversed. The charity receives income from the trust for a specific term and then the remaining value of the trust passes to your beneficiaries. Applicable charitable deductions can reduce the gift tax or estate tax due when the remainder interest passes to your beneficiaries.

Are You a Sitting Target?

Unfortunately, some individuals have a higher likelihood of being sued due to the nature of their professional or financial stature—in other words, those that have something to lose.

In our years of experience working with thousands of clients in the Wake County area, we find that asset protection planning is particularly important if any of the following apply:

  • You own a home and have an estimated net worth of $1M or more;
  • You own vacation property;
  • You own rental property;
  • You are high income-earning professionals;
  • You are high income-earning business owners;
  • You own a business with significant value.

Don’t leave yourself or your loved ones stuck dealing with the financial aftermath that a lawsuit, medical bills or long-term care costs, or unexpected tragedy can bring to your family. Contact Carolina Family Estate Planning today at (919) 443-3035 or fill out our online form to speak with someone about registering for a seminar or a Vision Meeting. You may also wish request a free copy Jackie Bedard’s book, Estate Planning Pitfalls: The Twelve Most Common Threats To Your Estate & Your Family’s Future.