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We have noticed, in our practice, more inquiries from estate planning clients about asset protection
considerations. Estate planning was customarily thought to arrange affairs to avoid or minimize estate taxes
and avoid probate. For many clients, there are more concerns: "How do I protect my assets?"
What Does Asset Protection Mean? Asset protection generally means protecting ones assets, during lifetime
and after death, from:
Creditors
Claims of spouses at divorce or death
Assurances that your plans and objectives will be carried out (protection for family changes and alterations)
Many clients have a nebulous idea about whose claims they are protecting their assets against. "Creditors"
usually means business creditors, through contract or tort liabilities (like auto accidents like malpractice
claims).
Spousal claims usually involve death or divorce. However, I am sure we all know of instances where inherited
property has been diverted into a spouse’s business and lost as a result. These kind of investment losses
may or may not be of concern to a client.
A client’s wishes and objectives can be thwarted, not only by creditors or spouses, but by failure of family
member trustees to properly administer assets or follow the terms of a trust. These family "deviations",
whether fraudulent or unintended, are worth discussing.
Creditor Claims. Creditors can be known creditors or potential creditors. Known creditors would be banks or
known claimants for injury, breach of a contract, or a claim for an unpaid debt. Typically, asset protection
planning, involves transfers of assets to family members or trusts. Such transfers always have a risk of attack
as "fraudulent transfers". Michigan, like other states, has specific statutes and case law on what
circumstances constitute fraudulent transfers, which can be pierced or reversed by a creditor. We are
assuming, for purposes of these comments, that we are not dealing with existing creditors breathing down a
client’s neck.
Potential creditors are another matter. They are typically in the form of professional and business liabilities.
How about the contractors, architects and engineers who built the septic treatment facility in Traverse City?
Or, what about the claims for medical malpractice that one hears about on a weekly basis? Professionals
and individuals in the construction business face large potential liabilities. The first line of defense against
these liabilities is, of course, insurance. Typically, individuals in professions or businesses should be
conscious of asset protection in their estate plan, in addition to carrying adequate insurance to provide both
protection and peace of mind.
Spousal Claims. With around 50% of marriages winding up in divorce, parents become especially aware of
what might happen to a child’s inheritance through death, divorce or bad investments. Clients are delaying
the outright distribution of assets to children or grandchildren in order to minimize exposure to these risks. In
some cases, as pointed out below, the organization or titling of assets would be important considerations in
overall estate planning.
A few comments would be in order about the general asset protection instruments: trust, titling, and business
organization. All of the comments below are based on the assumption that the establishment of a trust, a
limited liability company (LLC), or a joint tenancy, is not a fraudulent transfer.
Trusts. Various kinds of trusts are established during lifetime or at death for both estate planning and asset
protection purposes. In general, under Michigan law, a self-settled trust (like the typical revocable trust) is
subject to creditors claims both during the settlor’s lifetime and after death. Lifetime asset protection may
take the form of irrevocable trusts in friendly jurisdictions such as Delaware, whose laws are designed to
protect trust assets. Offshore trusts are special variation of asset protection trusts. These notorious
instruments are typically not part of the arsenal of preference for our clients.
Trusts protect the property for beneficiaries, by shielding the assets against the beneficiary’s creditors or
spouses until the property is actually distributed to the beneficiary. Michigan recognizes these "spendthrift"
trust provisions which insulate trust assets against claims of a beneficiary’s creditors. In other words, the
most typical case is to protect the assets against the beneficiary’s creditors or spouse.
Business Organizations. Typically traveling advisors and seminar sponsors will recommend a "family limited
partnership" or "family limited liability company" (LLC) to protect assets from creditors or spouses. We will
use the term "LLC" as an abbreviated term for this type of business entity. These days the LLC is the
preferred form of business entity here in Michigan. An LLC owner - called a Member - is protected two ways by
an LLC. The Member is protected from liabilities of the LLC’s operations. A Member also has considerable
protection from attacks coming the other way, from the Member’s personal creditors. If properly structured
such a creditor will find it difficult, if not impossible, to reach the LLC assets to satisfy a claim. When the
business entity form is used for asset protection, we caution clients that the proper formalities of business
organization and operation need to be followed for this technique to be effective.
Tenancy by the Entireties - Husband and Wife. Michigan law offers strong protection for property titled in the
name of the husband and wife, against the creditors of only one spouse. The formal name for this type of
ownership is "Tenancy by the Entireties". Michigan statute recognizes such ownership not only for real estate
but stocks, bonds or notes. We have no settled law to date as to whether that form of ownership would carry
over to a brokerage account, a customary form of security ownership now. The protection does not extend to
bank accounts because of the ability by one spouse to withdraw all the money. Tenancy by the entireties may
make a lot of sense from an asset protection standpoint, even though it does not offer optimum protection
from possible estate tax liability. Fortunately, estate taxes are becoming less of a concern to our clients
because of the large lifetime exemptions. In addition, a possible risk of higher estate taxes can often be
mitigated by life insurance on the life of the exposed spouse.
Conclusion. We will devote the next few newsletters to more in-depth discussions of how these techniques
work, what makes them effective, and the pitfalls.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
considerations. Estate planning was customarily thought to arrange affairs to avoid or minimize estate taxes
and avoid probate. For many clients, there are more concerns: "How do I protect my assets?"
What Does Asset Protection Mean? Asset protection generally means protecting ones assets, during lifetime
and after death, from:
Creditors
Claims of spouses at divorce or death
Assurances that your plans and objectives will be carried out (protection for family changes and alterations)
Many clients have a nebulous idea about whose claims they are protecting their assets against. "Creditors"
usually means business creditors, through contract or tort liabilities (like auto accidents like malpractice
claims).
Spousal claims usually involve death or divorce. However, I am sure we all know of instances where inherited
property has been diverted into a spouse’s business and lost as a result. These kind of investment losses
may or may not be of concern to a client.
A client’s wishes and objectives can be thwarted, not only by creditors or spouses, but by failure of family
member trustees to properly administer assets or follow the terms of a trust. These family "deviations",
whether fraudulent or unintended, are worth discussing.
Creditor Claims. Creditors can be known creditors or potential creditors. Known creditors would be banks or
known claimants for injury, breach of a contract, or a claim for an unpaid debt. Typically, asset protection
planning, involves transfers of assets to family members or trusts. Such transfers always have a risk of attack
as "fraudulent transfers". Michigan, like other states, has specific statutes and case law on what
circumstances constitute fraudulent transfers, which can be pierced or reversed by a creditor. We are
assuming, for purposes of these comments, that we are not dealing with existing creditors breathing down a
client’s neck.
Potential creditors are another matter. They are typically in the form of professional and business liabilities.
How about the contractors, architects and engineers who built the septic treatment facility in Traverse City?
Or, what about the claims for medical malpractice that one hears about on a weekly basis? Professionals
and individuals in the construction business face large potential liabilities. The first line of defense against
these liabilities is, of course, insurance. Typically, individuals in professions or businesses should be
conscious of asset protection in their estate plan, in addition to carrying adequate insurance to provide both
protection and peace of mind.
Spousal Claims. With around 50% of marriages winding up in divorce, parents become especially aware of
what might happen to a child’s inheritance through death, divorce or bad investments. Clients are delaying
the outright distribution of assets to children or grandchildren in order to minimize exposure to these risks. In
some cases, as pointed out below, the organization or titling of assets would be important considerations in
overall estate planning.
A few comments would be in order about the general asset protection instruments: trust, titling, and business
organization. All of the comments below are based on the assumption that the establishment of a trust, a
limited liability company (LLC), or a joint tenancy, is not a fraudulent transfer.
Trusts. Various kinds of trusts are established during lifetime or at death for both estate planning and asset
protection purposes. In general, under Michigan law, a self-settled trust (like the typical revocable trust) is
subject to creditors claims both during the settlor’s lifetime and after death. Lifetime asset protection may
take the form of irrevocable trusts in friendly jurisdictions such as Delaware, whose laws are designed to
protect trust assets. Offshore trusts are special variation of asset protection trusts. These notorious
instruments are typically not part of the arsenal of preference for our clients.
Trusts protect the property for beneficiaries, by shielding the assets against the beneficiary’s creditors or
spouses until the property is actually distributed to the beneficiary. Michigan recognizes these "spendthrift"
trust provisions which insulate trust assets against claims of a beneficiary’s creditors. In other words, the
most typical case is to protect the assets against the beneficiary’s creditors or spouse.
Business Organizations. Typically traveling advisors and seminar sponsors will recommend a "family limited
partnership" or "family limited liability company" (LLC) to protect assets from creditors or spouses. We will
use the term "LLC" as an abbreviated term for this type of business entity. These days the LLC is the
preferred form of business entity here in Michigan. An LLC owner - called a Member - is protected two ways by
an LLC. The Member is protected from liabilities of the LLC’s operations. A Member also has considerable
protection from attacks coming the other way, from the Member’s personal creditors. If properly structured
such a creditor will find it difficult, if not impossible, to reach the LLC assets to satisfy a claim. When the
business entity form is used for asset protection, we caution clients that the proper formalities of business
organization and operation need to be followed for this technique to be effective.
Tenancy by the Entireties - Husband and Wife. Michigan law offers strong protection for property titled in the
name of the husband and wife, against the creditors of only one spouse. The formal name for this type of
ownership is "Tenancy by the Entireties". Michigan statute recognizes such ownership not only for real estate
but stocks, bonds or notes. We have no settled law to date as to whether that form of ownership would carry
over to a brokerage account, a customary form of security ownership now. The protection does not extend to
bank accounts because of the ability by one spouse to withdraw all the money. Tenancy by the entireties may
make a lot of sense from an asset protection standpoint, even though it does not offer optimum protection
from possible estate tax liability. Fortunately, estate taxes are becoming less of a concern to our clients
because of the large lifetime exemptions. In addition, a possible risk of higher estate taxes can often be
mitigated by life insurance on the life of the exposed spouse.
Conclusion. We will devote the next few newsletters to more in-depth discussions of how these techniques
work, what makes them effective, and the pitfalls.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |
| January 2006 ESTATE PLANNING AND ASSET PROTECTION by James R. Modrall III, J.D., C.P.A., David R. Appleford, J.D., L.L.M. (Taxation) |