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How Can I Protect My Assets?

Asset protection planning involves analyzing your individual circumstances and applying a lawful series of techniques to protect your assets from claims of future creditors. The techniques are designed to deter potential creditors from pursuing your assets, generally by making it difficult or impossible for future creditors to acquire your assets or collect judgments against you.

Where significant assets are involved, Asset Protection planning often includes setting up a series of trusts or partnerships to hold legal title to your assets. A future creditor, recognizing how difficult it would be to collect on any judgment, might be willing to settle for pennies on the dollar.

There is a definite line between “legal” Asset Protection planning and actions to defraud creditors, which are criminal. For that reason, it is essential to have an experienced attorney guide you through the process.

What is estate planning?

Estate Planning is a process to consider alternatives for, to think through and to set up legally effective arrangements that would meet your specific wishes, if something happens to you or those you care about. Proper Estate Planning is more than just a simple Will. Estate Planning also typically minimizes potential taxes and fees and sets up a contingency plan to make sure your wishes regarding health care treatment are followed.

On the financial side, a good Estate Plan coordinates what would happen to your home, investments, business, life insurance, employee benefits (such as a 401(k) plan), and any other property in the event you became disabled or died. On the personal side, a good Estate Plan includes directions to carry out your wishes regarding health care matters so that if you ever are unable to give the directions yourself, someone selected by you could make those decisions and would know when you would want them to authorize heroic measures on your behalf or when you would prefer they pull the plug.

How can I reduce my Estate Tax upon my death?

According to the current law, in 2015, Federal Estate Taxes are only charged against Estates with assets exceeding $2 million. If you think your Estate will exceed $5,430,000 at the time of your death, or $10,860,000 million if you are married, proper planning can be used to reduce death (estate) taxes by lowering the value of your Estate at the time of your death. The amount that is exempt from Federal Estate Tax will increases with inflation adjustments, and then in 2010 there is no federal estate tax. However, in 2011 the Federal Estate Tax will be returned to the 2002 level of $1 million.

What is a Living Will and how is it different from a Will?

A Living Will, also known as a Directive to Physicians, is a separate document from a Will. A Living Will designates how you wish to be cared for regarding your medical care and treatment while you are still alive, should you be unable to specify those wishes yourself. For example, you can designate whether or not you wish to be kept on life prolonging machines if there is no longer any hope that you will recover from an accident or long-term terminal medical condition.

The difference between a Will and a Living Will is that the Living Will dictates how you will be cared for while you are still alive and a Will dictates how your assets will be divided after you pass away.

What is a Trust?

A trust is a legal entity that owns assets for the benefit of a third person (a “beneficiary”). The Grantor or Settlor of a Trust is the person who set up and gave money or property to the Trust. The Trustee of a Trust is the person charged with keeping the assets safe and invested properly. The Trustee is also charged with distributing assets from the Trust to the Beneficiary at the proper time. The Grantor can pretty much decide how the money must be kept and when it may be distributed. For example, the Grantor may decide that the money is to be invested or kept in interest bearing accounts, real estate or only in government insured FDIC accounts. Additionally, the Grantor may decide that distributions can only be made to the beneficiary when that beneficiary reaches a certain age or the Grantor may decide to split out distributions such as one-half when the beneficiary turns age 18 and the remainder when the beneficiary reaches the age of 21. The Grantor of a Trust can also be the Trustee of a Trust, if the Grantor decides to set a Trust up in such a manner. For example, the Grantor may set him or herself up to be the Trustee of a Trust for his or her child’s benefit.

What is a Bypass Trust?

A Bypass Trust, sometimes called a Life Estate or A-B Trust, is a way for couples of combined estates of more than $2 million, in 2008, to be exempt from estate tax if one or the other dies. This amount, which is exempt from Federal Estate Tax, increases to $3.5 million in 2009 and then in 2010 there is no federal estate tax. However, in 2011 the Federal Estate Tax is returned to the 2002 level. As you can tell, the amount is unpredictable and the government will probably change this amount many times during our lifetime.

A Bypass Trust is designed to let the $2 million tax exemption, or whatever amount it may be at the time of the first death, be used by each spouse. Through a Bypass Trust, the surviving spouse can receive any portion of the decedent’s estate free of estate tax. The surviving spouse never legally owns the property within the Bypass Trust because it is legally owned by the Trust, but the surviving spouse can use the assets and property within the Trust estate. However, when the surviving spouse dies, the amount remaining in the Bypass Trust passes free of estate tax to the next generation.

When should I consider preparing a Revocable Living Trust instead of a Will?

Because probate in Texas is relatively inexpensive (the fee to file your application for probate in the Texas courts is typically less than $250), there is usually no need for a Revocable Living Trust if all of your assets are located within Texas. However, this is not true in other states where probate fees can range to as much as two to five percent (2%-5%) of the entire estate. In those certain states, it would clearly make financial sense to avoid probate by implementing a Revocable Living Trust. Therefore, one of the reasons for considering a Revocable Living Trust would be if you owned real estate in a state other than Texas where probate fees are high.

A second reason for considering a Revocable Living Trust is for the privacy aspects it provides. For famous athletes or people living in smaller cities this sometimes is an issue. A Revocable Living Trust can provide privacy as a Trust, unlike a will, would not be filed in the courts upon that person’s death.

A third reason for implementing a Revocable Living Trust is if you would prefer that a bank, or other institution, assist in handling your financial affairs once you become disabled. Powers of Attorney are often used to help handle financial matters for disabled persons, but institutions cannot be named under a Power of Attorney, only individuals may be named. Thus, in this instance a Revocable Living Trust would be the preferred method.

One reason not to have a Revocable Living Trust is the myth that it saves more estate taxes than a Will. The same federal estate tax laws apply to both a Will and a Revocable Living Trust so there is no benefit of one over the other with respect to saving estate taxes.

A second reason not to have a Revocable Living Trust is that you believe it will protect your assets. In fact, a Revocable Living Trust provides absolutely no protection from lawsuits and it is not considered a “Spendthrift” Trust, which would protect your assets.

Finally, as a consumer tip, never allow an attorney to charge you a percentage of the estate to handle a probate in Texas. While that type of transaction might be legal in some other states and a good reason to have a Revocable Living Trust in those other states, you should avoid that in Texas and obtain an estimate of the legal fees from your attorney before the estate administration begins.

Because Revocable Living Trusts can be quite complicated, it is in your best interest to seek legal counsel to assure your plan goes as smoothly as possible.

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