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Asset protection and estate planning done right are both a part of the same plan.
Even a perfect estate plan, at best, is in reality a death plan because nothing happens until you die. Then, and only then, will your assets go to your heirs (or into a trust, partnership or other entity for their benefit).
But wait, you ain’t dead yet. In the meantime, are your assets protected? Today? Tomorrow? For the rest of your life?
What’s my point? Well, it's common knowledge that your death plan should protect your assets from the IRS when you go to heaven. But what about a plan to protect your assets from today (the day you sign your estate planning documents) until the day you go to that better place?
How and when should your asset protection plan be done? The when is easy: when you do your estate plan, do a lifetime plan at the same time. Your lifetime plan must include your asset protection plan.
IMPORTANT NOTE: Your lifetime plan also should include (1)how to maintain your lifestyle (and your spouse’s, if married) for the rest of your life; (2)how to deal with inflation; (3)succession planning for your business; (4)what if one of your kids gets divorced and (5)a host of other issues unique to every family and business owner.
Next, the how of asset protection: for most law-abiding Americans, asset protection is a three category subject: (1) protect you and your spouse; (2) protect your kids and grandkids; and (3) protect your business.
Before detailing the categories it is important to understand the goal of asset protection: to protect assets from possible lawsuits (even if you lose and are held liable), creditors, divorce claims and frivolous claims.
Following is a list of the basic (no attempt is made to cover all possibilities) dos, don’ts and strategies to make sure your assets (wealth) are protected:
Protecting you and your spouse
1. Your residence(s): transfer to a “qualified personal residences trust” or hold title 50 percent in your revocable (estate planning) trust and 50 percent in your spouse’s trust.
2. Other real estate you own (whether vacant or improved): each property should be in a separate LLC. Exception: properties that are not too valuable can be grouped in one LLC.
3. Investments (cash/stocks/bonds/CDs, and the like, as well as your interests in the LLCs in 2 above): transfer to a family limited partnership (FLIP).
4. Do not co-sign or guarantee loans for friends or family. (Your kids or grandkids could be an exception, but don’t bet the family farm.)
5. Cars can be an expensive asset destroyer:
a) Don’t own the car of an adult child.
b) Don’t own vehicles jointly with your spouse.
c) Don’t let other people drive your car unless your insurance has proper coverage.
6. You and your spouse must execute property powers of attorney.
Protecting your kids and grandkids
1. Never leave property – including life insurance proceeds or retirement plan funds – directly to a minor. Always put it into a trust, to a FLIP or some other protection device.
2. Beware of the divorce devil.
a) Never have your adult kids own life insurance policies on your life (or second-to-die).
b) If your kids or other family members own stock in your closely held business, make sure you have a proper buy/sell agreement to be certain the business stays in the family.
c) Investments (See 3 in the first category): give the kids limited (non-voting) units in the FLIP, which is a perfect asset protection device, locking out an ex-spouse.
3. Sometimes kids must be protected from themselves. If a minor (or maybe even an adult) is a spendthrift, on drugs, has special needs, or other problems, set up an appropriate trust.
Protecting your business
1. Don’t operate your business as a sole proprietorship or as a general partnership… incorporate your business.
2. Keep your corporation thin, which means the corporation owns assets that are absolutely necessary to operate — cash (distribute excess cash if an S corporation), inventory and accounts receivable. Here’s the drumbeat:
a) The following should be owned by separate LLCs and leased to the corporation:
(1) Land that the business uses to operate. It’s okay to leave the building in the company as a leasehold improvement.
(2) Expensive equipment, furnishings and signage.
(3) Vehicles (most lawsuits against businesses are the result of vehicle accidents).
(4) The company should not use its cash to make investments, own artwork or own any other non-business asset.
b) If you are a C corporation, become an S corporation so you can make distributions (dividends) without being double taxed.
3. Your corporation should never own life insurance on any of the stockholders. You don’t want proceeds open to creditor claims.
Let’s sum up. Your death plan should be designed to protect your wealth from the IRS. Your estate plan — no matter how perfect — is not done unless it includes a lifetime plan (from today to the day the grim reaper gets you). Asset protection is an essential part of your lifetime plan… designed to protect your wealth from any third party or court that tries to take away any part of your wealth.
Want to know more? Browse my website at www.taxsecretsofthewealthy.com. Have a question? Call me (Irv) at 847-674-5295.
Irv Blackman, CPA and lawyer, is a retired founding partner of Blackman, Kallick, Bartelstein LLP and chairman emeritus of the New Century Bank (both in Chicago). Want to consult, need a second opinion? Call Blackman at (847) 674-5295. E-mail him at firstname.lastname@example.org or visit www.estatetaxsecrets.com.