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CALIFORNIA ASSET PROTECTION TRUSTS: QUESTIONS & ANSWERS
First, let's be clear: a Revocable Living Trust generally does not provide asset protection. This upsets people at times 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. Which really 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 access to the trust assets. Think about it like this: If your beneficiaries can't reach trust assets, neither can a creditor. (Please note though that recent court decisions have eroded some of this protection and done so - in the authors opinion - in an unconstitutional manner. But for the moment at least, there is still a lot of protection available for the beneficiaries of your estate planning via a Revocable Living Trust, Special Needs Trust and/or IRA Retirement Trust, if these trusts are drafted to suit this purpose.)
But what if you specifically want asset protection for yourself?
Well fortunately there are ways to obtain asset protection for yourself. The degree of planning needed however, depends upon your situation, objectives and goals. For my clients with a net worth of $1,000,000 or less, I 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. Similarly, if you own property, make sure you have great insurance on that property. For your health care 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, properly – so that it is not later pierced and held to be invalid. These small tips will help limit your risk with regard to car accidents, health care 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. But 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 for people with a net worth of less than roughly $1,000,000 to explore asset protections trusts? Well, people commonly set up an irrevocable asset protection trust and voluntarily give up “direct” control as well as the benefit of asset(s), to achieve certain long term care public benefit goals. How does this work you wonder? During life, 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 really prudent planning to implement so as to preserve a person's lifestyle and stave of bankruptcy-for example, for a person with disabilities who receives governments benefits. Most commonly for elders, these irrevocable trusts are set up to obtain Medi-Cal and/or Veterans Aid & Attendance Pension Benefits to help pay the long term care expenses of seniors. That is, 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 more information about Elder Law Public Benefits Planning, please see visit our Medi-Cal and/or Veterans Aid & Attendance Pension Benefits pages
For people who are looking for asset protection, in the traditional sense, there's much more to discuss. You see, unfortunately those with a net worth of between $1 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 ten 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 my experience, there is a sweet spot where lawyers (who really should be disbarred, but I digress...) “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. I have found that these “mom and pop” millionaires are great targets for litigious bad actors and the lawyers who represent them. What I 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. (Who can blame them?) So 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, at least they keep some of their wealth, and frankly, 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.
I find it all incredibly disgusting, disturbing and wrong. That is why in collaboration with the nation's leading asset protection attorney, Douglass Lodmell, we help our clients establish Bridge Trusts ® and we provide that help, at no additional cost to our clients. The Bridge Trust ® is a breakthrough Asset Protection concept which “bridges” the best features of a Foreign Asset Protection Trust, yet is even easier to use and maintain than a Domestic Asset Protection Trust.
The Bridge Trust ® is a fully registered Asset Protection Trust with a certificate of registration from an offshore trust jurisdiction right from day one. The foreign Trustee is also in place from Day 1, and the due diligence is done on the client right up front, when it matters and when waters are calm. The Trust is then stepped back into the US for tax purposes and from the perspective of the IRS is considered a simple domestic revocable grantor Trust.
What this means is that the client may be the Trustee, the Trust does not need a separate tax identification number, it can use the client’s social security number, and the Trust need not file a separate tax return or any foreign trust compliance forms. The net effect is that The Bridge Trust ® is as easy to use and maintain as a typical Living Trust – Except if there is ever an “Event of Duress”, the foreign Trustee may be activated by declaration of the Protector and the Trust jurisdiction can be fully moved offshore with all of the protections of a full Foreign Asset Protection Trust, with an inception date of when the Trust was established, not when it becomes foreign!
For more information about The Bridge Trust ®, please watch this video created by asset protection attorney Douglass Lodmell.
In summary, to protect your legacy from your or your loved one's creditors and predators, you will need an attorney 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. That is to say, we routinely set up asset protection trusts that preserve the financial future for seniors who can, with proper planning, qualify for Medi-Cal and Veterans Pension Benefits. For children with special needs, we also set up Special Needs Trusts and help trustees navigate the financial, tax, and social security disability complexities that arise with such trusts. When our clients have blended families, we regularly create IRA Retirement Trusts which can help your retirement plans from ending up in the “wrong” hands” or from being wasted by children's divorcing spouses, disgruntled business partners, foreclosures, bankruptcies, and even by spendthrift kids own bad spending habits. Finally, for the ultimate in Asset Protection, we help clients establish Bridge Trusts to prevent litigious bad actors from taking advantage of them.