Ideally, you want the assets you have amassed throughout your life to go to the people you care about the most. To ensure that happens, you should look into asset protection planning.
Protecting your assets properly is critical if you want to keep them away from creditors, taxes, and even potential seizure. Failing to secure your assets and your loved ones could be left with next to nothing following your untimely passing.
In this article, we will highlight the asset protection methods available to residents of New York State. We will discuss each option in great detail to determine which one makes the most sense for your current situation.
Understanding the Importance of Asset Protection
Before we get into the asset protection methods you can try, let’s first take a moment to discuss what it is all about.
We want to think that we are in complete control of our assets. Since we own those assets, we can determine where they end up when we pass away. But unfortunately, things do not always work that way.
As we hinted in the intro, your assets could become exposed to taxes as well as claims made by your creditors. Even the government could seize your assets if there are issues with your estate.
When assets remain unprotected, they remain easily accessible to the government and your creditors.
For example, a creditor could file a lawsuit against your estate and recoup damages if they win. After that verdict, they can use the assets in your estate to provide compensation. However, your loved ones could get nothing from your estate due to that chain of events.
The debt you have accumulated over the years could also come back to haunt you.
An asset protection plan provides security against those concerns.
Asset protection is an aspect of estate planning you want to take care of as early as possible. You do not want to be in a position where you are on the hook for a massive payout that could bleed your estate dry. As much as possible, you want a plan in place early so an unforeseen disaster cannot completely ruin your family’s financial future.
Who Are the People That Need Asset Protection Plans?
Asset protection is useful to everyone, but it benefits certain individuals more than others. Therefore, detailed in this section of the article are the people who need to get started on asset protection immediately.
Professionals in High-Liability Industries
Your line of work could expose you to potential liability regularly. That is typically the case with accountants, financial managers, lawyers, and anyone who works in the healthcare industry. If there is an established track record of people in your industry getting sued by their clients, it is a good idea to develop an asset protection plan early on.
Remember that the burden of proof for personal injury cases is lower than for criminal cases. A plaintiff will easily get the court to rule in their favor, so you need protection against that.
Business Owners That Have Direct Dealings with the Public
Whether you sell a product or a service, you should set up safeguards for your assets if you deal directly with the public. Set up a plan to protect you from the errors your employees may make.
Getting that plan ready is especially important if you have a physical location. That way, your assets will remain protected even if someone receives injuries on your property.
Landlords should also strongly consider consulting with a lawyer to create an asset protection plan. Since you cannot always watch over your rental property, it is a good idea to set this safety net in place.
People with Recurring Credit Card Debt
Credit card debt can creep up on you and gobble up a big chunk of your estate if you are not careful. If you almost always have a significant amount of credit card debt, you must immediately get into asset protection planning.
Homeowners with an Underwater Mortgage
Setting up an asset protection plan is worth your time if your mortgage is underwater. A mortgage is underwater when its balance is higher than the property’s market value.
That is a bad financial spot to be in. Shield your loved ones from it by investing in estate planning and asset protection.
Individuals with Considerable Assets
Lastly, getting into asset protection planning is essential if you have amassed a significant collection of assets. Do not allow a single incident to completely wipe out your assets. Instead, set protections in place so your assets remain secure no matter what happens.
What Are Your Asset Protection Options in Long Island?
Protecting your assets is highly recommended, but how do you do that? In New York State, there are some good options available. Let’s discuss them in greater detail below.
Create a Limited Liability Company
The first option we need to discuss if you are interested in asset protection involves creating a holding company. You want to establish a limited liability company (LLC) for asset protection. (LLC).
Only the assets under the LLC’s name are the ones potentially exposed to creditors and other parties that may come after your estate. Any assets you keep out of the LLC are safe, and you still maintain ownership over them.
Establishing an LLC in New York State is a fairly straightforward task, but you should enlist the help of a lawyer to get set up quickly. Your lawyer will also let you know if you need to secure any licenses or permits.
Before you establish your LLC, we want to point out some potential issues that could stem from using that business entity as a shield for your assets.
For instance, you still must maintain a certain level of financial investment in the LLC, or else the court may sense something suspicious about your dealings. You also need to be careful about the way you move assets in and out of the LLC because they could amount to violations.
Form a Family Limited Partnership
While coming up with ways to keep your assets protected, consider forming a family-limited partnership.
For those who may not be familiar with this type of legal entity, it is a setup where family members pool their money together to start and operate a business.
The general partners are the ones in charge of the family limited partnership. A specific group can have one or more general partners.
Limited partners also have a stake in a family limited partnership. However, they do not have a say regarding how you operate the entity.
You should be interested in forming a family-limited partnership because it can protect assets from certain taxes. You can generally transfer assets placed in the partnership to another partner without incurring any gift taxes. In addition, you can also protect the value generated by the asset from taxation.
The stakes held within a family-limited partnership also become protected from creditors. Those stakes may only become accessible to an outside claimant if a general partner consents to that.
We must point out that you should place only certain assets inside a family-limited partnership. If you are careless while transferring your assets, you may jeopardize the protections provided by this legal entity.
Make sure you consult with an attorney before forming a family limited partnership.
Set Up an Irrevocable Trust
Next up, let’s discuss the prospect of setting up an irrevocable trust to protect your assets.
To be clear, you want to create an irrevocable trust and not its revocable counterpart.
If you rely on a revocable trust for asset protection, you must know that your assets are still exposed. After a creditor secures a judgment against your estate, the court may order your estate to revoke the trust and provide the necessary payments. Whatever protection the revocable trust provides can be undone by the court.
You can effectively avoid that problem by choosing an irrevocable trust.
Irrevocable trusts can shield assets from taxation and creditor claims. In addition, the courts will typically not modify the terms of an irrevocable trust unless they believe the grantor’s wishes are no longer being honored. So, if you created the irrevocable trust to protect assets in mind, it should get the job done.
Of course, irrevocable trusts still carry some risk for grantors. Even if you are the grantor, you cannot modify an irrevocable trust easily. You will first need permission from the trust’s beneficiaries to make those changes.
Carefully consider what you want to do with the irrevocable trust to avoid potential issues down the line.
Establish a Foreign Asset Protection Trust
According to the Legal Information Institute, an asset protection trust is a self-settled trust. It is also a spendthrift trust. These trusts become shielded from creditors.
Creditors will still be unable to claim the assets in an asset protection trust even if they sue your estate.
Setting up an asset protection trust is more difficult than establishing a typical irrevocable trust. There are certain elements you must include in asset protection trusts. Those elements include the trust protector and the distress and flight clauses.
You and your lawyer must engage in lengthy discussions to ensure that your trust’s elements are properly structured. It is crucial that you get the structure of your trust right the first time around because they are also irrevocable.
In the header, we mentioned that you must consider establishing a foreign asset protection trust. That is because creating one based in New York State is currently not an option.
Thus far, only Alaska, Delaware, Hawaii, Indiana, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Carolina, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming have laws that recognize asset protection trusts. Since you are a Long Island resident, your best option is to create an asset protection trust that is in a different country.
Foreign asset protection trusts are also considered stronger relative to their domestic counterparts. That is another reason you should consider creating one to protect your assets.
Lean on the Legal Concept of Tenancy by the Entirety
Are you hoping to keep your real estate investments protected from potential claimants? If so, you should consider purchasing the properties in question together with your spouse.
In New York State, when a married couple purchases a real estate property, the interest they have invested in the property is known as tenancy by the entirety.
Tenancy by the entirety dictates that the married partners have an undivided interest in the property they purchased together. The law does not see them as individual owners; instead, they regard them as a single party that owns the property.
That ownership structure has significant ramifications for the property. For instance, when one spouse dies, ownership of the property transfers immediately in full to the surviving partner. Also, you cannot sell a property owned through tenancy by the entirety unless both spouses consent to it.
More importantly for this article, a property owned through tenancy by the entirety is shielded from individual debts. That means a claimant cannot try to seize control of the property if only one of the spouses owes them an outstanding debt. Claims against the property will only be valid if the two spouses who own the property share the pursued debt.
Have you started working on asset protection planning yet? If you have not, now would be a good time to change that.
Contact us at the Alber Law Group, and we will help you secure your assets. We will lay out all the available options so you can select the one that works best for your current situation.