Answers to Key Asset Protection Questions

January 21, 2009
Robert J. Mintz, JD

MDNG Endocrinology, January 2009, Volume 11, Issue 1

When I sit with clients to prepare or review their estate planning and asset protection goals, a wide variety of questions and issues arise.

When I sit with clients to prepare or review their estate planning and asset protection goals, a wide variety of questions and issues arise: What plan is most efficient? How are tax savings created? How do we protect against lawsuit and business risk? Although I have addressed many of these topics in previous columns, I have compiled answers to several commonly asked questions.

If I have a will, do I also need a living trust?

A will is an essential part of a basic estate plan and should accomplish a variety of objectives; primary among them is specifying who will receive your property and designating a legal guardian for your minor children, if you have any. Potential estate taxes may also be an important consideration. The current law exempts amounts up to $3.5 million in 2009 but only $1 million after 2010. Congress is likely to adopt a new and permanent exemption amount at some point, and the tax provisions of your will should be designed to minimize estate taxes until the law has been settled.

What a will does not do for you is avoid a probate of your estate. A probate is a public, court-supervised collection of your assets, payment of taxes and other creditors, and then a distribution of the remaining amounts to your beneficiaries. In many states, this can be a time-consuming and expensive process. To avoid this, most estate planning lawyers recommend a living trust in addition to the basic will. Property that has been transferred to the living trust prior to death is not subject to the probate process and passes smoothly and efficiently to the named survivors. All the estate planning objectives of passing property, minimizing taxes, and taking care of family can be accomplished with the living trust, but the additional advantage of probate avoidance almost always makes this the preferred estate planning choice.

Do I lose any tax benefits if I put my home in a trust?

The popular tax benefits associated with home ownership are the mortgage interest deduction and the ability to avoid gain on home sale taxes ($250,000 for an individual and $500,000 for a married couple). Clients will often elect to transfer a home into a trust for estate planning purposes and asset protection. But, if they want to keep the tax benefits, we need to draw the trust as a grantor trust (in the form of either a revocable trust or an irrevocable trust) following rules set out in the tax code in order to avoid unintended tax consequences.

Are retirement plans valuable for asset protection?

Qualified retirement plans (usually defined benefit plans and 401ks with a non-owner employee) have unlimited protection from most lawsuits and creditors, regardless of the amount. Non-qualified plans like IRAs are protected under many state laws for “reasonable retirements needs” and in bankruptcy for up to $1 million in contributions. Also, all distributions taken from these plans are entitled to the same asset protection rules. However, although a retirement plan is a good overall strategy, you should consider the possible tax consequences before stuffing all of your spare savings into a retirement plan. All distributions from a retirement plan are taxed at ordinary income tax rates, currently as high as 36%. The favorable tax treatment of capital gains and dividends (subject to a maximum 15% tax) is lost when distributed from a retirement plan. Weigh the benefits of the current deduction and deferral against the potentially greater tax rates on distribution when considering any program of retirement plan contributions.

What is a life insurance trust?

If the total value of your estate, including life insurance policy proceeds, exceeds the estate tax exemption, then the balance is taxed at the applicable rate. With tax rates that may be as high as 55% in 2011, a $1 million policy may only net $450,000 for your beneficiaries. To avoid this, a life insurance policy can be held in an irrevocable life insurance trust (ILIT), which can be drawn to own the policy, remove it from your estate, and provide a large, non-taxed fund for your survivors. With an ILIT, your ability to access and manage the policy is substantially restricted, but if tax savings are a concern then the ILIT may be a worthwhile solution.

Robert J. Mintz, JD, is an attorney and the author of the book Asset Protection for Physicians and High-Risk Business Owners. To receive a complimentary copy of the book call 800-223-4291 or visit www.rjmintz.com.


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