Many times the purpose of estate planning may be directly in conflict with the purpose of asset protection and creditors’ rights. For instance, perhaps gifting by parents to the children over a number of years makes excellent tax advice and addresses estate planning concerns. Yet, if the parents should suddenly find themselves in a financial challenge, such as an unexpected failed business, or real estate investment that leads them personally exposed to lenders, bankers, or the like, then the gifting that was made in good faith could be considered a fraudulent transfer under certain circumstances. As a result, the bankers, lenders or other creditors could actually sue the children to get the money from them to pay the parents’ debts. What you should do in this situation depends on a lot of factors and you should consult a firm like Iurillo Law Group, P.A. in conjunction with your probate or trust lawyer.
Contrarily, here are some situations where the interests of a client who is considering estate planning matters also get the benefit of protection from creditors’ rights, i.e. they are exempt and creditors cannot get to those assets even if the individual owes money to those creditors. For instance, life insurance policies are exempt prior to the death of the policy owner and are exempt from creditors of the policy owner once the policy owner passes. Let’s again assume that the parent is the policy owner and the children are the beneficiaries. Even if the parent owes money to creditors, the children receive the proceeds free and clear of any claims of creditors. However, if the parent passes and the children receive the proceeds of the insurance policy and the children have their own creditor problems, then those assets are not exempt from levy of creditors. The children may lose the benefit of the insurance proceeds.
A whole separate article could be written on what options parents have to protect assets upon their death if their children have financial challenges or otherwise are not fiscally prudent such as a spend thrift trust, which is beyond the scope of this particular article.
Another investment vehicle known as an annuity contract is not only exempt from levy of creditors, but also the proceeds cannot be reached, regardless of who is the beneficiary. IRAs, 401Ks and other retirement accounts are generally exempt and protected, but there is a big caution here. Many times clients assume that their retirements or pensions are IRS qualified, but a detailed study of the plan documents are very important. There are many types of plans. For example, deferred compensation “Top Hat” that may not meet the statutory exemption requirements would not be exempt from levy of creditors.
So I have listed a number of investments or saving vehicles which may be in the best interest of an individual for estate planning purposes and perhaps to avoid probate, but also from a creditors’ rights standpoint in protecting assets from future creditors. However, each exemption must be critically analyzed so that you as an individual know what the pros and cons of the different investment vehicles are.
We invite you to contact the lawyers at Iurillo Law Group, P.A. to further answer your questions to protect you and your family.
The contents of this blog and website are for informational purposes only and do not constitute legal advice. Use of and access to this blog and website do not create an attorney-client relationship between the user and Iurillo Law Group, P.A.