Asset Protection

A perfect estate plan is in reality a death plan, because the most significant things only happen after you die. Only then will your assets go to your heirs or into a trust, partnership or other entity for their benefit.

But how do you protect your wealth in the meantime? We’ve discussed many times the importance of protecting your assets from the IRS after you die, but what should you do to protect them from the day you sign your estate planning documents until your death?

When you create an overall estate plan, establish a lifetime plan at the same time. This lifetime plan must include measures to protect your assets while you are still alive and should cover: how you and your spouse, if you are married, will maintain your lifestyle for the rest of your life, how to deal with inflation, succession planning for your business, what happens to your assets if one of your married children gets divorced, and other issues unique to your family and to you as a business owner.

For most law-abiding American business owners, asset protection should cover three categories: 1) you and your spouse, 2) your children and grandchildren, and 3) your business. The overall goal is to protect your assets from lawsuits (even if you lose and are held liable), creditors, divorce claims and frivolous claims.

Following is a list of some of the basic dos, don’ts and strategies to make sure your wealth is protected in each category.

You and Your Spouse
1. Protect your residence(s). Transfer ownership of any homes into a qualified personal residence trust (QPRT), or hold 50 percent of the properties in your revocable trust (set up in your estate plan) and 50 percent in your spouse’s trust.

2. Protect other real estate you own, whether vacant or improved. Each property should be owned in a separate limited liability company (LLC). Less-valuable properties can be grouped together in one LLC.

3. Protect your investments. These include cash, stocks, bonds, CDs and the like, as well as your interests in the LLCs mentioned above. Transfer these investments into a family limited partnership (FLIP). 

4. Stay away from loans. Do not co-sign or guarantee loans for friends or family. You can consider making exceptions for you children or grandchildren, but don’t bet the family farm.

5. Be smart about automobiles. Cars can be an asset destroyer. Don’t own the car of an adult child, don’t own vehicles jointly with your spouse and don’t let other people drive your car unless you have the proper insurance coverage.

6. Execute property powers of attorney for you and your spouse.

Your Kids and Grandkids
1. Never leave assets directly to a minor. This includes property, life insurance proceeds or retirement plan funds. Always use a trust, FLIP or some other protection entity.

2. Beware of the divorce devil. Put measures in place to protect your wealth in the event that one of your heirs gets divorced.

• Never allow your adult children to own insurance or second-to-die policies on your life.

• If your kids or other family members own stock in your closely held business, make sure you have a proper buy/sell agreement to ensure that the business stays in the family.

• To protect investments, give your children limited (non-voting) units in a FLIP, locking out any ex-spouses.

3. Protect your children from themselves. If your minor or maybe even adult child is a 
spendthrift or has other problems, set up an appropriate trust.

Your Business
1. Incorporate your business rather than operate it as a sole proprietorship or as a general partnership.

2. Keep your corporation thin. Set it up so that the company itself only owns those assets that are absolutely necessary for it to operate: cash (if it’s an S corporation, distribute excess cash), inventory and accounts receivable. 

The following should be owned by separate LLCs and leased to the corporation:

• Land that the business uses to operate. It’s okay to leave the building in the company as a leasehold improvement.

• Expensive equipment, furnishings and signage.

• Vehicles. Most lawsuits against businesses are the result of vehicle accidents.

The company should not use its cash to make investments, or own artwork or other non-business assets. If it is set up as a C corporation, convert it to an S corporation so distributions (dividends) can be made without being double-taxed.

3. The corporation should never own life insurance on any of the stockholders. You don’t want proceeds open to creditor claims.

To summarize: Your death plan should be designed to protect your wealth from the IRS. Your estate plan—no matter how perfect—is not complete unless it includes a lifetime plan as well. Asset protection is an essential part of a lifetime plan. It protects your wealth from any third party that tries to take it away from you or your heirs.