Some people may think that asset protection is only relevant for very wealthy people who are trying to avoid paying taxes. Nothing could be further from the truth.
All families need asset protection, whether rich, middle-class, or poor. Asset protection is a legal method of arranging your assets in such a way as to protect them from a future creditor attack. It is most effective when done early, with the benefit of thought and planning.
Imagine a woman, Nancy, in her mid-60s, married to her husband, George, who is five years older. George has his own accounting practice but his memory is not what it used to be. They have two adult children, one of whom has never really worked properly due to alcohol dependency, and three grandchildren, one of whom has autism.
Nancy recently developed a heart condition and had to retire early. She and George have worked their entire lives, and they have a primary home and an investment home, several retirement accounts, a couple of bank accounts, two life insurance policies, and a brokerage account. The value of all these assets is approximately $2.5 million.
Here are five reasons why asset protection would be beneficial for Nancy and George:
An elderly person may need to receive long-term care in the future, such as home care or nursing home care. In New York City, full-time home care and nursing home care costs approximately $20,000 per month. Very few people have sufficient savings to be able to afford this cost for the necessary length of time.
Since George’s memory is starting to deteriorate, he may have an early onset of dementia. Nancy will not be able to take care of him herself and will need outside help. To the surprise of many, Medicare does NOT pay for long term care. Medicaid is the only government program that can pay for long-term care.
George can become eligible for Medicaid in New York—but only with proper planning. There are many different options available for Medicaid planning, each with different tax and control implications. Asset transfers either to trusts or directly to children can preserve these assets for George’s family, while making him eligible for long-term care assistance from the government.
To be most effective, Medicaid planning should be done before the care becomes needed. All transfers, including the transfer of a home, are subject to a “look back penalty” in New York, which means that Medicaid will not cover nursing home costs for a period of up to five years after the transfer was made. Therefore, it is very useful to do the transfers early enough so that sufficient time passes before the Medicaid application for coverage is made.
Protecting Money From Irresponsible Adult Children
Some families have members with problems related to drugs, alcohol, gambling, creditors, and so on. Leaving money directly to such people is a risk, because these adults are likely not use it for good purposes.
George and Nancy should not be leaving money directly to the child with alcohol problems. Their responsible child can instead manage the money for him.
Trusts can be written in such a way as to control the distribution of money to a profligate family member, with the result that the money will be protected, both from the person and from his or her creditors.
Special Needs Planning
A child or a relative with special needs may require government assistance for the rest of his life. Government assistance covers housing and medical bills, and provides a basic income. However, these programs cover only the most basic needs, and relatives may want to enhance the life of the child with special needs.
Nancy and George should not name their autistic grandchild as a direct beneficiary on their accounts. Getting money directly will jeopardize the grandchild’s benefits.
Instead, there are methods of providing money for a special needs relative in a way that preserves his eligibility for government programs. Setting up a Special Needs Trust and naming that Trust as a beneficiary on some of their accounts and in their Will may be the family’s best solution.
Protecting Money From Irresponsible Young Children
If someone leaves everything in his will directly to minor children, then under New York law the children will receive the money, including life insurance proceeds, at the age of 18. Some may feel that this is too early, since many children are still irresponsible at that age.
George and Nancy may want to leave money to their grandchildren directly, but they should do it in a proper manner.
Wills and trusts can be written in such a way as to delay the child’s receipt of money either until a specified age (25 is usually more appropriate than 18), or until a specified time in a child’s life (such as college graduation or marriage).
Protecting Money From Your Own Future Creditors
George is engaged in a business where there is a possibility that he will be sued. Nancy may cause a car accident due to her heart condition. As a result, both of them may want to shield as many of their assets as possible now. Moving the assets after a creditor has already materialized may be considered fraudulent and will not be effective.
There are many ways to shield assets, including irrevocable trusts, LLCs, corporations, family limited partnerships, and trusts in other jurisdictions.
Remember that there is no one correct solution that applies to everyone. The key to protecting your assets is to do so before asset protection becomes a necessity. You should create a plan that reflects your wishes and your family. Talk to a qualified estate planning attorney, who will be able to review your situation and create an appropriate individualized plan.
Katya Sverdlov, CFA, Esq. is an attorney focusing exclusively on estate planning, elder law, special needs planning, and probate. Prior to becoming a lawyer, Katya spent twelve years working for several top Wall Street financial companies. Katya can be reached at SverdlovLaw.com, 212-709-8112, or firstname.lastname@example.org
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