I’ve always been a big believer in the concept that life is very simple if you allow it to be. I think the same holds true with Asset Protection. So long as you do a little bit of planning, you can receive a very high level of Asset Protection with very little work. Here’s an example: The other day I had a client–let’s just call him M.–give me a call. It seems he had messed up his taxes for the last few years and was going to owe about four or five hundred thousand dollars to the IRS.
Even though it was a relatively large amount, he had a great attitude about the whole thing. He knew he messed up; he knew he owed it; and he wanted to pay it off, but he wanted to do it under his terms, not the IRS’s.
At that point I inquired as to what, if any, planning he had engaged in before incurring the tax debt. He pretty much said that everything would have to be scrapped and started over from scratch (he bought a fancy package from a guy called Bill Reed) . . . in short, he had no protection.
Now there was a slight twist to his situation. His successful aunt cared a great deal about him and was planning to give him $1.8 million when she passed away. In fact, due to her health, the gift is probably mere months away. The challenge is that when he told her about his issues with the IRS, she became very upset and said she didn’t want to leave anything to him if the IRS was going to just take it away.
Bummer.
Let’s pause for a moment and consider 99% of estate plans, flawed estate plans if you will. It doesn’t matter if someone is using a trust, will, or both, they typically provide that their heirs or beneficiaries will be given assets outright. That is to say that little Johnny and little Susie will get the cash, car or home transferred into their name when Mom and Dad pass away. Sure, Mom and Dad might spread out the inheritance where 50% is given at 18 and 50% given at 35 or some similar plan, but in the end, the kids get the assets outright.
That is just stupid.
Why? Because if Johnny or Susie get a judgment against them, the “judgment creditor” has the same rights in Johnny or Susie’s assets that Johnny and Susie do. If Johnny and Susie own the asset outright and are free to do anything with it, then the judgment creditors enjoy the exact same rights, which means the judgment creditors are going to take away those assets, and there is no protection. If Johnny or Susie owe the IRS money and receive a large inheritance, the IRS can get the inheritance.
Lets get a bit personal and talk about divorce. If you inherit a few million dollars and just so happen to be married to a predatory spouse, what is going to happen in divorce? If instead the money is set up in a trust, how much is the ex-love of your life going to receive?
Let’s go back to M. If his aunt leaves him $1.8 million outright, in hard, cold cash, and the IRS has a lien against him for $500,000, guess who is paid first? Yep, the IRS.
What is the incredibly simple solution?
Have the aunt leave the assets in trust for M. M. and his family will be the beneficiaries of the trust, which means the trust assets are used for his benefit. Heck, M., can even direct the investments of the trust. The bottom line is that so long as the trust is structured correctly, M. can still get his shiny red Ferrari, and the inheritance is protected from his creditors.
By the way, lets talk about the proper structure. A lot of people will tell you to set up a spendthrift trust and you are protected. That’s bum advice. In fact, California even has a law saying that 25% of a spendthrift trust’s assets are up for grabs. You need to make sure the trust is stronger than a mere spendthrift trust.
Moral to the story: Never, ever, ever, give assets outright to your loved ones. Make sure the assets are wrapped up in the protection of a trust. The kids and grandkids can still buy their shiny, red Ferraris, but their assets are protected.
Plan of action: If you are expecting to receive an inheritance, talk to the people who are going to leave it to you and see if they would be willing to add a few pages to their estate plan so that the assets come to you in the form of a pre-packaged trust. Sure, it might be a bit of an awkward, self-serving conversation. At the same time you’ll probably find the other party receptive, and very happy the money they leave you isn’t going to your creditors.
Along the same lines, make sure your estate plan (if you don’t have one, shame on you) doesn’t leave anything outright, but rather places assets into trust before going to the beneficiaries. Just by taking that simple step, your kids and grand kids can enjoy Asset Protection for the rest of their lives.
Keep in mind that as you start establishing an estate plan, a tax plan, or an Asset Protection Plan, you need to make sure that all the pieces are coordinated. Many times we’ll talk with a client and the pieces of their plan don’t work together. For example, their living trust, (established by one attorney) is the holder of their S corporation (established by their CPA), which manages their LLC (established by an internet service). The only problem is that none of these providers took the time to know the entire picture, and the plan wasn’t as beneficial as it could be.
As normal, if you have any questions, give us a call or email us so we can discuss your particular situation and see if we can provide some solutions for your family.
Tim Berry, JD
