California Asset Protection Trusts: Questions & Answers
When it comes to protection from creditors and predators, the first thing you should know is that a revocable living trust generally does not provide asset protection. This reality upsets some people because they really want protection, and they have "heard" they can get it with a trust. We suspect people are confused because sometimes asset (i.e. creditor) protection is available with trusts, even with a revocable living trust. That protection is not available to the person(s) who set up the trust, however. Rather, it is later available to beneficiaries (usually one's children) if there is a spendthrift clause (at a minimum) in that trust and those beneficiaries have very limited access to the trust's assets. This brings up how asset protection is achieved in the first place. People obtain asset protection by giving up control of their assets. This can occur with “ordinary” estate planning when a revocable living trust becomes irrevocable (for example, when the person who set up the trust passes away or some other triggering event occurs). In this way, the beneficiaries of your revocable living trust (usually your children) may obtain asset protection so long as they do not have direct unfettered access to the trust assets. Think about it like this: If your beneficiaries can't reach trust assets, neither can a creditor. (Please note that recent court decisions have eroded some of this protection — and in our opinion — in an unconstitutional manner. But for the moment, there is still a lot of protection available for the beneficiaries of your estate planning via a revocable living trust, special needs trust, litigation avoidance trust, blended family trust, and/or IRA retirement trust, if these trusts are drafted to suit this purpose. In addition, for our clients who need to qualify for Medi-Cal and/or Veteran's Pension Benefits, we regularly set up Medi-Cal Asset Protection Trusts as well as Veteran's Asset Protection Trusts and by doing such, our clients qualify for public benefits and they do so without having to worry about the State or Federal Governments coming after them or their assets, forever.)
What if You Specifically Want Asset Protection for Yourself?
Fortunately, there are ways to obtain asset protection for yourself. The degree of planning needed, however, depends upon your situation, objectives, and goals. For clients with a net worth of $1,000,000 or less, we focus less on asset protection trusts and more on practical, less expensive solutions.
Let's first explore these options:
- To limit the chance of someone attacking/attaching your assets, the first thing you should do is purchase excellent insurance. You can begin by upping your car insurance limits. Make sure you are with a good insurance company and have at least a $1 million dollar umbrella policy.
- If you own property, make sure you have great insurance on that property.
- For your healthcare needs, make sure you carry solid health insurance at all times.
- If you own a business (especially if it is a business with high risk), make sure you set up an appropriate entity like an LLC to house the assets of that business, and then run the business through that entity so it is not later pierced and held to be invalid.
These small tips will help limit your risk with regard to car accidents, healthcare costs, problems on property you own, and businesses you run.
As far as bankruptcy and divorce goes, those concerns are harder to address (so are tax problems/liens, etc.). These problems might be thought of as issues that you have control over, as opposed to the aforementioned problems that could happen as a result of events that are totally out of your control. If you have control, it is best to be prudent in your decision making. For example, prior to a second marriage, get a pre-nuptial agreement and be careful about who you marry. When making investments, you should probably be conservative if you are worried about losing equity. You still could have medical problems and other unforeseen circumstances might occur, but exercising caution, carrying excellent insurance, and being conservative will limit your chances of being personally liable for life's economic risks, while helping you preserve your financial future. (Also, please know that if your net worth is less than $1,000,000, there are solutions which help in bankruptcy proceedings. For more information about this possibility, keep reading.)
What Are Some Reasons People with a Net Worth of Less
Than $2,000,000 Explore Asset Protection Trusts?
People commonly set up an irrevocable asset protection trust and voluntarily give up “direct” control as well as (sometimes) the benefit of assets to achieve certain long term care public benefit goals. How does this protection work? Well, an irrevocable trust can be established by you, where you give up the control and the benefit of certain assets that you transfer to your irrevocable trust. This can be prudent planning to implement to preserve a person's lifestyle and stave off bankruptcy — for example, for a person with disabilities who receives government benefits. Most commonly for elders, these irrevocable trusts are set up to obtain Medi-Cal and/or Veterans' Aid and Attendance Pension Benefits in order to help seniors pay for their long term care expenses. In these cases, people voluntarily "give up" asset(s), so it is out of their state “estate” and is therefore not countable by the government for purposes of obtaining important government benefits, but these assets are not “given up” for federal tax law purposes, so people can retain positive capital gain tax benefits.
For people who are looking for asset protection in the traditional sense, there's much more to discuss. Unfortunately, those with a net worth between $1 million and $10 million have a target on their back, especially in California. Generally speaking, those with less than one million dollars in assets are usually not worth the time and effort of a lawyer to pursue in a lawsuit (especially since their target (i.e., you) can theoretically reorganize your estate in a bankruptcy proceeding, thereby rendering the original lawsuit impotent). Similarly, those with over $10 million dollars in assets typically do not make great targets for (unscrupulous) attorneys and their clients because these litigants can afford to, and often do, fight back. However, in our experience, there is a sweet spot where lawyers “find people who have been wronged” (supposedly) to go after other innocent individuals who have worked hard to accumulate a certain degree of wealth, but who are not super wealthy. We have found that these “mom and pop” millionaires are great targets for litigious bad actors and the lawyers who represent them. What we call “mom and pop” millionaires are easy to intimidate, very compliant, hate to litigate, don't want to spend years of their lives and tons of money defending themselves, etc. At the end of the day, these innocent individuals usually cave into unfounded claims and settle these bogus lawsuits for a large sum of their net worth. They rationalize that it is better than the uncertainty of a continued lawsuit and they are tired of being stressed out and losing sleep over the matter. So, these amoral litigants and their lawyers win, warping the legal process, often leaving these unfortunate mom and pop millionaires shell-shocked forever.
We find this all incredibly disgusting, disturbing, and wrong. Typically people don't think about these perilous situations unless and until they find themselves in them. Even then, most people are not really too concerned about the outcome because they think the legal system will ultimately provide them with the justice they deserve. But amazingly, most of the time, they are wrong about the legal system providing justice. That is why, in certain circumstances we help people set up domestic and foreign asset protection trusts which help ensure that hard earned assets are not lost to unscrupulous individuals and lawsuits.
In summary, to protect your legacy, you will need an attorney who is well versed in the area of asset protection trusts and creditor protection law. At Kaiden Elder Law Group, PC, we pride ourselves on being leaders in the asset protection trust arena. Besides keeping up with the law, we routinely set up asset protection trusts that preserve the financial future of elders who can, with proper planning, qualify for Medi-Cal and Veterans' Pension Benefits. For the benefit of children with special needs, we also set up special needs trusts and counsel trustees as well as trust protectors on how to navigate the financial, tax, and Social Security disability complexities that always arise with such trusts. When our clients have blended families, we regularly create litigation avoidance trusts, IRA retirement trusts, etc., which help prevent your assets from ending up in the “wrong hands” or from being wasted by children's divorcing spouses, disgruntled business partners, foreclosures, bankruptcies, and even kids' own bad spending habits. Finally, for the ultimate in asset protection, we help clients establish domestic and foreign asset protection trusts to help prevent litigious bad actors from taking advantage of them.
If you are interested in discussing asset protection trusts, please contact us for an initial consultation.