Establish asset protection when you don't need it

The down economy has significantly reduced the average American's discretionary income.  The effect is the consumer re-prioritizing where they spend their money.  Unfortunately, that has resulted in consumers sacrificing wiser, long-term beneficial expenditures in favor of short-term relief.  There are countless examples of this principle at work.  Choosing to forgo routine car maintenance will result in expensive repairs down the road.  Letting your expensive health insurance policy lapse to save money in the short term may result in incurring significant medical bills later.  Avoiding regular dental checkups can necessitate the suffering and cost of a root canal.

Another example of this is failing to draft and implement an asset protection plan before a claim against your assets arises.  When drafted and used correctly, the only real threat to assets inside of an asset protection trust are fraudulent transfer claims.  These are claims made by a creditor that assets were transferred to the trust to "hinder, delay, or defraud creditors."  Such claims will fail if the grantor can show that the transfers were made before a claim existed or the grantor had reason to know of a claim yet to arise.  That means that transfers to an asset protection trust need to be made while the waters are calm if the plan is to be completely effective.  this concept is sometimes referred to as 'seasoning' the trust.  The longer the time period between transfers to a trust and a claim against you, the more secure the trust assets will be.

If you think that one day such a claim might arise, then establish an asset protection plan now.  Funding an asset protection trust after events leading to litigation have already occurred will still provide you leverage in negotiations with  creditors.  However, you can't effectively transfer assets to a spendthrift trust unless the timing of those transfers is proper.  While avoiding the legal fees of creating an asset protection plan may boost your bank account a bit in the short term, if a judgment is found against you down the road, you'll be kicking yourself for not engaging in planning sooner.

The Cost of Probate

Of the many reasons you want to avoid probate, one of the biggest is the cost. I've written on avoiding probate in the past, but haven't addressed cost directly. Probate is the process by which the court oversees the distribution of your property to your heirs. Your heirs will have to visit the probate court if you have died without proper planning. There are several forms of probate in Nevada depending on the value of the estate. Most probates are of the summary (between $100K and $200K) and regular administration (greater than $200K) variety. Probate attorneys charge by the hour to work on these matters and their fees range from $250 to $400 per hour and above. From the initial petition to the final discharge, the process on average can take anywhere from 8 to 12 billable hours. That's if the process goes smoothly, however. If there's disputes among the family about the administrator, who is entitled to what, or any conflicts with creditors, then the time and expense will only grow.

In the end you're looking at a cost from about $2500 to $5000. Now of course, YOU are not looking at that cost, you're long gone. And that is the attitude I receive occasionally when it comes to engaging in the proper planning to avoid probate. The truth is, though, the cost of probate will come from the estate itself. Did you really leave behind cash, maybe putting aside a little bit extra your heirs, only to see it further depleted to pay a probate attorney? Additionally, you are leaving behind what is sure to be a headache to your heirs and preventing them from enjoying the assets you've left behind for at least a few months.

Probate can be avoided by planning your estate during your life. Moreover, estate planning will cost a fraction of what probate costs. In addition, planning your estate will not only avoid probate, but allow you to be prepared if you are ever incapacitated during your life, keep your estate private, and allow you to make post-death decisions regarding how your assets will be distributed.

I do both probate and estate planning and while I'm more than happy to be serve as your estate's probate attorney, I'd much rather see you for your will and trust.

Special Power of Appointment Trusts

Unlike basic estate planning, asset protection is constantly evolving. Nevada spendthrift trust law remains the best in the country with the State Legislature frequently making tweaks and adjustments to keep it that way.

However, a new type of asset protection trust has become popular recently and one of its advantages is that it functions just as well in any jurisdiction. It's known as the Special Power of Appointment Trust (aka "SPA Trust"). It uses the power of appointment, a well-established estate planning tool, to allow the trustee of an irrevocable trust, in his full discretion, to appoint assets back to the grantor without sacrificing creditor protection.

This irrevocable spendthrift trust functions as most any other with an independent trustee endowed with discretionary powers of distribution to named beneficiaries. However, it does not require a "self-settled trust" situs like Nevada, Alaska, Delaware, etc., where local trust law allows the grantor to also be a beneficiary. Instead the grantor bestows a special power of appointment upon the trustee, who in turn, may choose to use that power of appointment to appoint assets back to the grantor. The technique does not jeopardize the asset protection of the trust thanks to the inherent prevention within this type of power of appointment that prohibits the "donee" of the power, in this case the trustee, from appointing assets to himself or his creditors. The "permissible appointee," here, the grantor, may receive assets without being a beneficiary, which in a majority of states, would eliminate any protection from creditors that trust is written to provide.

Noted asset protection attorney Lee McCullough, III has brought this tool to the attention of asset protection attorneys, including myself. You can read more about it at his website, or in the article published in the January issue of Estate Planning Magazine.

If you're interested in asset protection and/or what a SPA trust can do for you, call my office.

Protecting your money from yourself

A person is a spendthrift when they spend money recklessly or wastefully. A spendthrift trust is an irrevocable trust established on behalf of a beneficiary that gives full control to an independent trustee who will, in his sole discretion, determine when the beneficiary will receive distributions. It's done this way to protect a spendthrift beneficiary from recklessly or wastefully using the trust assets.

Two reasons why it's so desirable are 1) it provides protection of the trust assets from creditors of the trust creator (the grantor) because the assets are no longer in the grantor's possession. A creditor of a person can't reach what that person doesn't own. And 2) the beneficiary is prevented from spending the trust assets set aside for the beneficiary's benefit without the approval of the trustee. Unless the trustee actually makes a distribution, the beneficiary doesn't have a claim on the trust property.

This type of trust is most commonly used all over the country by parents who want asset protection and want to ensure their children use the trust assets wisely, taking advantage of the two benefits listed above. A unique use in Nevada, and another handful of states that allow self-settled spendthrift trusts, is for the grantor to place assets in the trust to protect them from himself or herself.

Nevada allows the grantor of the trust, the person who contributed the trust assets, to also be a beneficiary and trustee. I've had a couple cases recently where my client knew that if he had the cash, he would spend it unwisely. In both cases these clients had a lot to lose. They each wanted the safeguard of asset protection and the limitation of access to the cash in the trust. In both cases, I named the client as grantor and beneficiary. In one case we appointed a committee of family members as co-trustees and in the other, a bank as trustee. In both, we designed the trust with specific guidelines regarding the payment of living expenses, medical expenses, education and other related needs. We also set up an allowance, again on a discretionary basis, to be distributed to the grantor-beneficiary. The result was a limitation on the availability of funds to the literal spendthrift.

It's difficult to find an institution whether it be a bank or a life insurer or otherwise, who will create a product that doesn't provide access to deposited funds. Most likely they will discourage withdrawals from accounts like CDs or permanent life insurance policies with cash penalties, but access is still available. This is the best solution I'm aware of that will provide full asset protection and limitation of distributions to the original owner of the funds. Of course, it can't happen without the cooperation of the grantor, but when it works, the benefit is immense.

Funding a Revocable Trust

Signing your revocable family trust feels like a significant accomplishment. You've thought for years about getting it done and when you finally have your estate planning binder in hand, you feel a sense of satisfaction. However, the trust document won't do you any good unless you actually fund the trust.

I always tell my client to think of the trust as a box. I can help you construct the box, but unless you put your assets into it, it can't provide any of the benefits for which you created it. Funding the trust requires changing title and ownership of your assets from yourself to the name of the trust. Recording a new deed for your home, going into the bank to complete change of ownership forms, and changing the beneficiary designation on life insurance policies are the most common.

Part of the estate plan I prepare for you includes a table of assets. It's a grid displaying all of your property and how each should be titled. It helps you keep track of everything you own to ensure that all assets that should be in the trust make it into the trust. I will also assist you with these transfers, including preparing Nevada deeds and providing letters of instruction for title transfers of your other assets.

While actually drafting and signing the trust may the biggest task, funding the trust is the most important.