Wealth preservation and estate planning go hand-in-hand

Posted On: March 2020

A central tenet of any estate plan is the protection of your assets. You’ve worked a lifetime to build your wealth, and you undoubtedly want to pass as much of it to your loved ones as possible.

Asset protection strategies can range from simple to quite sophisticated. We’ll review some of the more popular strategies, but the main takeaway to keep in mind is that it’s best to begin planning earlier rather than later.

Asset protection made simple

Traditionally, asset protection strategies have focused on avoiding or minimizing federal estate tax liability. Although estate taxes remain a concern for some families, most should find sufficient tax shelter under current estate tax law. However, be aware that estate taxes may still apply at the state level.

For instance, the Tax Cuts and Jobs Act (TCJA) hiked the unified gift and estate tax exemption to $10 million (subject to inflation indexing) for transfers to nonspousal beneficiaries and for assets passing tax-free to a spouse under the unlimited marital deduction. The indexed exemption amount for 2020 is $11.58 million. Also, portability effectively allows couples to double this tax shelter to $23.16 million. (Bear in mind, however, that the exemption amount is scheduled to drop significantly in 2026.) Finally, you can still use the annual gift tax exclusion of $15,000 per recipient in 2020.

Thus, you can simply “gift” assets to your loved ones, realizing the estate tax benefits of the exemption and gift tax exclusion amounts.

For some, asset protection is as easy as that — case closed. But this simplified approach requires you to give up control of those assets during your lifetime, which might not be desirable or feasible. As a result, more complex techniques may be preferred.

There’s a trust for that

Frequently, trusts are featured in an asset protection plan. The traditional bypass trust (or A-B trust), which was created mainly to avoid federal estate tax, is still a viable option. Such trusts offer protection from creditors, while continuing to provide tax shelter.

A similar variation, often called a spendthrift trust, can be established for a beneficiary who isn’t qualified to manage investments or might indulge in spending sprees. An independent trustee assumes the financial management responsibilities.

With a qualified terminable interest property (QTIP) trust, a grantor can provide an income stream for a surviving spouse while still determining the disposition of the trust assets when the spouse dies. This enables a surviving spouse to maintain a comparable lifestyle. A QTIP trust is often used by someone who has remarried and has children from a prior marriage. The children typically receive the assets when the trust terminates.

Another type of trust, the domestic asset protection trust (DAPT), has been growing in popularity. This is a “self-settled” trust, where the grantor personally benefits from the income.

The main objectives are to provide protection from creditors and retain control over the assets. Accordingly, DAPTs may be used when there’s a divorce or spendthrift concerns.

Currently, 19 states have enacted legislation authorizing DAPTs. They are Alaska, Connecticut, Delaware, Hawaii, Indiana, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming.

Business considerations

Asset protection is also vital to business owners. Depending on your situation, you might form a company as a C corporation to protect your business assets or as an S corporation providing partnership-type taxation. There are additional factors at work, so choose the business form carefully.

Choosing the right asset-saving strategy

If you are concerned about wealth preservation, contact us. We can analyze your set of circumstances and devise an ideal asset-protection plan.

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