A number of techniques can be used to protect assets against estate taxes and the claims of creditors. This article reviews some of the techniques that should be considered. Asset protection strategies should be examined in light of your overall business, tax, and estate planning goals. In addition special care should be taken to avoid running afoul of fraudulent transfer laws.
Estate Planning
Unified gift and estate tax credit. This credit allows each taxpayer to shield up to $600,000 from estate and gift taxes. To make the most of the credit, married couples should consider transferring assets so that each spouse holds at least $600,000.
Annual gift tax exclusion. Taxpayers are permitted to make annual tax-free gifts of up to $10,000 per recipient ($20,000 for gifts made by a married couple). These gifts allow taxpayers to transfer large amounts of wealth to family members while reducing their taxable estates and placing the transferred assets beyond the reach of creditors.
Trust. Assets transferred to a spouse on death are generally free from estate taxes under the "marital deduction." Properly structured testamentary trust permit a couple to make the most of the marital deduction and to provide income for the surviving spouse, protect the assets against creditors' claims, and preserve the assets for their children.
Form of Ownership The manner in which title to properly is held can have a significant impact on the property's vulnerability to creditor claims. For example, property held by a husband and wife as joint tenants with rights of survivorship can generally be used to satisfy the debts of either spouse. But property held as tenants by the entireties can only be used to satisfy joint liabilities. If one spouse has greater liability exposure (e.g., a physician), it may be a good idea for the other spouse to hold title to the personal residence and other assets as separate property.
Note: The techniques available vary depending on the laws of the state in which the couple resides or in which the property is located.
Homestead property. In many states, a primary residence, or "homestead," is exempt from creditor claims. An effective asset protection strategy is to use nonexempt assets to pay down mortgage on an exempt residence.
Family Businesses Family limited partnerships. A family limited partnership allows senior family members to transfer a significant portion of a family business or property to younger family members without giving up control, while reducing estate taxes and providing limited protection against creditors.
Buy/sell agreements. Properly structured buy/sell arrangements among family business owners can often be used to establish the value of the business for estate tax purposes.
Estate freezes. Estate freeze techniques allow a business owner to shift the benefits of future appreciation to the younger generation (and to remove that appreciation in value from his or her estate) while retaining control of the business. The rules that apply to estate freezes are very complex, so careful planning is critical.
Qualified retirement plans. Qualified retirement plan accounts and benefits are generally exempt from the claims of creditors. IRAs offer some, but less, protection.
Non qualified deferred compensation. This is simply an agreement by the company to pay for an employee's services at a future date. If properly structured, these funds are not taxed until they are received and may be protested from creditors.
Life Insurance Trusts A properly structured irrevocable life insurance trust can be used to protect the policy and proceeds against creditor claims and remove the proceeds from the insured's taxable estate.
Offshore Trusts A foreign asset protection trust (APT), typically established in a foreign country that does not enforce U.S. judgments, may shield assets from litigation awards and offer some protection against creditors (but it can't be used to hide assets from current creditors). APTs are complex and expensive, and the grantor must be willing to place the trust assets beyond his or her reach for a significant amount of time. However, for people whose professions or other circumstances expose them to a high degree of risk, an APT may be worth a look.
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