An important goal of estate planning is to protect income and assets from creditors' claims and tax collection. While many people think asset protection involves shady or dishonest techniques, there are many ways to protect financial reserves, personal property, real estate and other assets for retirement or for future generations.
In addition to federal and state laws that exempt certain types of property from creditors' claims, taxation or both, there are numerous estate planning tools that may be able to shield assets from future creditors and reduce or eliminate estate or income taxation.
If you are interested in working with an estate planning attorney to create a plan to protect your assets, contact our firm today to schedule a consultation.
A family limited partnership (FLP) can be one of the most valuable asset protection strategies for a family whose members want to preserve their assets while retaining control over them. FLPs are set up much like traditional limited partnerships with "general partners" (frequently parents) and "limited partners" (usually the children).
General partners manage the partnership’s assets, make investment decisions, share in the FLP’s income and are responsible for the FLP’s debts. Limited partners have an ownership interest in the FLP and share in income generated by the FLP, but they have little or no control over the FLP’s activities and are responsible for the FLP’s debts only to the extent of her or his ownership interest.
FLPs are designed to reduce estate and gift taxes by taking advantage of valuation discounts, the annual gift tax exclusion and the unified credit.
Valuation Discount. Because interests in FLPs are generally not marketable (that is, interests in FLPs cannot be converted easily to cash at a known market price), a discount for lack of marketability (DLOM) is typically appropriate, and a DLOM often significantly reduces an FLP’s value for estate tax purposes. A minority discount may also be available to reduce the valuation of an FLP interest given to a limited partner who has only a noncontrolling interest in the FLP.
Annual Gift Tax Exclusion and Unified Credit. Under the annual gift tax exclusion, gifts of an individual’s FLP interests up to a certain dollar amount, to different recipients and within the same year are exempt from the federal gift tax. Similarly, under the unified estate-and-gift tax credit (also called the unified credit or applicable exclusion), estates are exempt from the federal transfer tax up to a certain dollar amount.
Because valuation discounts reduce an FLP's estate and gift tax value, the benefits of the annual gift tax exclusion and the unified credit are greater for assets transferred through the FLP than for assets transferred outside the FLP.
A properly structured FLP or other limited liability entity may also provide protection from creditors; however, there are limitations with respect to the extent of asset protection that this type of planning can provide. These limitations vary by state and by type of entity.
For many years, shifting ownership of assets to a spouse whose risk of liability is less than that of the other was a commonly-employed asset protection technique. Subject to the laws against transfers for the purpose of committing fraud, assets owned by a spouse are not usually available to satisfy a judgment or order against the other spouse.
A creditor that wants to sue a person who has placed his or her assets into a trust, a foundation or other entity may find that there are very few assets actually owned by the person they wish to sue.
Assets owned by a trust, foundation or similar entity are generally not subject to claims against its beneficiaries. In addition, placing assets into an asset protection entity can remove those assets from a person's estate tax estate.
Taking steps to protect your assets from creditors' claims, the availability of valuation discounts to reduce the estate or gift tax value of your FLP and strategic use of the annual gift tax exclusion and the unified credit can result in significant preservation of your assets.
If you have questions about asset protection or other estate planning objectives, contact our firm to schedule a consultation with an estate planning lawyer.