Two Asset Protection Strategies for a Secure Retirement

The best asset protection plans are those designed to solve a specific problem. There are a wide variety of legal tools which can be used to minimize liability risks and the appropriate plan is one which is designed specifically to address the current and likely future needs of the client.

In this article we will look at 2 common asset protection situations to see how the client’s particular circumstances can affect the design of an asset protection plan. In the first example, the client needs access to his accumulated savings to pay for current living expenses. This is often the case for those who are fully or partially retired. Also, those who rely on income from investment real estate often use cash flow for living expenses and surplus for new investments. In these cases the necessary income is produced by the assets the client wishes to protect. This contrasts with cases where the client has a source of income separate from accumulated assets and doesn’t need the income produced by those assets for living expenses. This is the case for those practicing medicine or any other profession or who are employed in business or own a stable company. Our distinction here is those who derive all or most of their income from their assets and those whose earnings are separate from their savings.

Client Needs Access to Savings for Living Expenses

Client A, a married couple in their 60’s, have funds in various retirement plans as well as non-qualified savings. They need access to these savings for living expenses but want both asset protection and estate planning.

This is a familiar request. Retired individuals living off accumulated savings are particularly concerned with any risk of loss since savings cannot be replaced. Unanticipated liability can arise from any number of sources. Highest on the risk list is uncovered medical expenses, but business and family circumstances can also generate significant and realistic risk to any amount of retirement savings. Most individuals who have a nest egg of savings intended to provide retirement security want to make sure the funds are protected from unexpected claims.

The hurdle that must be overcome in these situations is that the laws of most states do not offer creditor protection to simple trusts which are intended to provide income and principal distributions to the grantor. Living trusts, which are often used in estate planning, may effectively carry out those purposes but will not have an impact for asset protection. It is established law in a majority of states that a trust created by grantor who is entitled to mandatory or discretionary distributions will be subject to creditor claims to the extent of the full amount the trustee is permitted to distribute. This type of trust is known as a self-settled spendthrift trust and offers no asset protection except in those states which specifically approve of these trusts (16 states as of now). (See “New State Laws Allow Residents to Shield Assets from Creditors”)

The first thing to check then is the law of the client’s state to see if these asset protection trusts are permitted. If they are, creating such a trust may be one solution to the client’s current need for income. The laws of these states generally allow distributions of income or principal to the grantor but protect the funds from future creditor claims. That means creating a trust to protect assets but carving out the ability to receive distributions of income or principle. Language of the trust must be careful drafted and the law of each state contains particular rules and limitations, but this is certainly one option to consider in the planning stage.

If the client resides in a state which has not adopted specific asset protection trust legislation, other solutions may be appropriate. In some states family limited partnerships and limited liability companies may be useful if the law significantly restricts a creditor’s ability to collect assets held within one of these entities. We’ve previously discussed “charging order” limitations (see article) which are particularly strong in some states. The protection afforded by these entities may have some benefits in certain circumstances and can be investigated.

Again depending on the law, one or more of the creditor protected entities can be established together with a trust which is designed to further restrict creditor access and enhance asset protection features. In a sense, the income portion of an asset can sometimes be legally separated from the asset itself, so that income can be produced for retirement purposes while the asset itself remains protected. When this can be accomplished it may represent a full or partial solution for the client who wants income and asset protection. Sometimes sophisticated plans make use of insurance products or retirement plans to create assets which are specifically exempt from creditor claims. There are many ways to protect assets and produce income for living expenses and the full range of these options often depends on state law and planning techniques which take advantage of available exemptions and protections afforded by state law.

Client Does Not Need Access to Savings

Client B earns an income from a professional practice and does not intend to use accumulated or future savings for current living expenses. The client’s goal is to hold and manage his investments to build up a retirement portfolio. Asset protection in this case means shielding savings and investments from liability risk while working, so that the funds are available to meet his retirement goals.

Those who earn a sufficient amount from their practice or employment so that they do not need to currently live on their savings have a variety of available asset protection options. When savings are intended for a child’s college education and/or retirement needs, clients may wish to protect accumulated and future savings from ordinary liability risks or those specifically associated with a professional practice, such as disputes with regulatory agencies, insurers, employers, partners, business associates, and patients.

When the client’s goal is to protect assets while saving for retirement, there are many varieties of “Retirement Plans” which may be available depending on the law of the state. For example, some states only protect retirement plans which follow specific IRS rules on coverage of employees, maximum contributions, and permitted benefits. Others, such as California, specifically allow the exemption of Private Retirement Plans from collection, without reference to restrictive IRS rules. That means that savings plans established for an individual, with savings devoted to the purpose of retirement, can be protected from any claims while in the plan and when distributed. (See “California Private Retirement Plans: Asset Protection Benefits”)

In states without this specific legislation, a non-qualified retirement plan can often be fashioned from existing laws. For instance, in most states trusts can be drafted to act like retirement plans and protect savings during the high liability period during business activity. Asset protection variations sometimes include the use of limited liability companies to shield personal wealth from “dangerous assets” such as investment real estate and operating businesses. Because creditor access may be limited to a “charging order” a Family Limited Partnership is often appropriate for use as a holding company to protect ownership of savings and shares in investment entities. It may also have substantial estate planning and tax planning benefits which can preserve assets for family members.

Asset protection planning offers a variety of solutions tailored to specific client needs and circumstances. Those who are retired and rely on current savings for living expenses may find domestic or foreign asset protection trusts, or creditor protected entities to be effective planning strategies. Those who have sufficient earnings from other sources of income may be able to design an appropriate retirement plan using retirement or other trusts and entities to protect assets as permitted under state law.

Robert J. Mintz, JD LLM, is an attorney and the author of the book “Asset Protection for Physicians and High-Risk Business Owners.” To receive a complimentary copy of the book visit www.rjmintz.com.