Understanding Your Asset Protection Plan

Outside of a basic set of best practices and common risks, asset protection plans are as fact specific as the care you give your patients. There are however, some ideas that are almost never the right choice.

Last week I shared the details of the incomplete (if not financially fatal) advice  one physician got from a source with questionable experience. That advice involved some common misconceptions among lay people and advisors about very basic legal and risk management concepts.

Understand the True Role of Your Estate Planning

For the most successful and/or generous of you, your estate planning may involve gifts and other asset transfers to your heirs or favorite charities. These assets typically include legal tools, tax planning, and life insurance, which may offer incidental asset protection benefit during your life. For the other 90 percent of Americans however, including most affluent doctors, an estate plan typically takes the form of a will or a revocable living trust (RLT) that is really about death planning and making sure your loved ones are provided for and that the assets you left for their care are managed and distributed efficiently.

I have personally consulted with three high net worth individuals this month that were explicitly under the impression that their estate planning in the form of an RLT created asset protection for the assets they were going to put into it or fund it with. In each case the clients said they needed to get some planning done, and that they wanted a trust, expecting that it would be both an estate plan and provide protection for the assets they put in it. I explained that, on its own, an RLT (or a will) would not provide any asset protection, from their risks, during their lives.

This core concept is confusing to most consumers and advisors, and shockingly, even some attorneys. Fortunately, the basic legal issues that keeps trusts of this type from providing protection during your life are simple:

•The trust is revocable. This is intentional and allows you to be in the unique position of being able to create a trust with specific instructions for what happens and who is in charge after you pass on and actually put title to assets in it. At the same time, you are still able to change your mind about any of the details at any time during your life without almost any restriction at all (In stark contrast to an irrevocable trust, in which transfers are permanent and the property is no longer yours and legally belongs to the trust). Don't like the trustee anymore? Change him or her. Don't want to give that nephew anything after what he said last Thanksgiving? Drop him. Want to sell the home you put in the trust and spend the money on your new practice? Do it. Complete flexibility and the fact that any transfer to the trust is reversible and has no tax* implications at the time of transfer is one of the most attractive features of the revocable trust.

•You are the trustee. You are the grantor of the trust and are typically the person who has legal and administrative authority over during your life, known as the trustee. You name successor trustees who serve after you when you are no longer able to or living.

•You still own the property. The property in the trust is still yours for all practical purposes because the trust is revocable, you have control over the trust and the assets as the trustee and full discretion to add, remove and transfer trust assets.

The combination of these factors makes the RLT a great, flexible estate planning tool, but not an effective asset protection structure. Put simply, if you have the authority to remove an asset from a revocable trust it is accessible to any of your creditors. That's okay, it is good enough at what it does and was intended to do as an estate plan, and it's a tool I use for that purpose every week. Understanding that even the best tools have limits and specific uses is critical.

*This is not specific tax or legal advice, always consult qualified counsel on these issues