Creating an estate plan is not just about transferring assets to beneficiaries or saving on taxes when someone dies. It’s also about protecting you and your heirs’ property from any potential future creditors.
Litigation tends to rise during times of economic turmoil. When a person or company files for bankruptcy, funds you received from them which are included in your estate plan may be sought by other individuals or government entities in bankruptcy court.
When are these assets potentially vulnerable?
Beneficiaries must understand whether the assets they receive might be subject to attachment through fraud conveyance laws, which can void financial transactions when constructive or explicit fraud occurs during the transfer.
Constructive fraud is when a person or entity gains an advantage through deceitful or unfair methods and does not have to be intentional. Explicit fraud is when someone knows it’s likely an existing creditor will seek the assets they receive.
How can assets be protected?
An experienced estate planning attorney here in Texas can help you protect these assets by:
- Funding a protective trust: Funding a trust at death can protect assets through a Spendthrift Clause and granting discretionary powers to an independent trustee over making distributions. The governance of the trust can also be changed to a state with more favorable asset protections in place.
- Transferring assets to an LLC: Limited liability companies offer protection as once the assets are transferred, creditors have limited access rights. However, you must treat the LLC as a business to take advantage of those protections.
- Creating an annuity: Private annuities are similar to those sold by insurance companies, allowing you to exchange assets for scheduled payments. Some of these do have tax consequences, but private annuities do protect the principal from creditors.
Enhance asset protection through estate planning
The best outcome is that creditors will never sue you or your estate. However, your lawyer can maximize protections by drafting and funding protective trusts for your spouse, kids and other beneficiaries. They can also advise you on the benefits of an LLC or private annuity.