There are many articles and more than a few attorneys who are touting the need to do an asset protection trust to protect your assets from claims of creditors or others. Often, they will use fear to motivate you. They might talk about huge liability claims that could devastate your estate or talk about the possibility of long-term care expenses and how you could lose your home and other valuable assets. While there certainly is the risk of an accident or other huge catastrophic event that would cause you liability and potential loss of significant assets, and while long-term care expenses are always a concern given the expense of skilled care ranges between $90,000 and $150,000 per year, many of these pitches and seminars given to promote asset protection trusts are overstated.
It is important to understand your particular liability exposure risk and particularly in regard to what assets you have and how they are titled. Titling of assets and the nature of your assets can make all of the difference. For example, most individuals have a large portion of their estate in their homes and retirement plans. Most retirement plans are in the form of a 401(k), a 403(b), or an IRA, and those are protected by federal law from the claims of creditors. If you are a single person, your real estate owned by you individually is potentially exposed to your creditors and/or any claimants. For married couples who own real estate jointly as husband and wife in Michigan, that is a form of joint ownership known as “tenancy by the entirety.” If one spouse is involved in a car accident and they are deemed to be negligent and the injured party brings a claim beyond the available liability insurance, the injured party cannot reach the married couple’s jointly owned real estate. The spouse who is not involved in the accident is not responsible for the negligence of the spouse operating the vehicle, and the property cannot be separated without both spouses joining in the conveyance or both spouses being liable. In that scenario, it is critical to understand how vehicles should be titled. If the spouse who was negligently driving an automobile injured a third-party owns the vehicle in their name alone, then their spouse is not liable and their real estate cannot be attached by the injured party. However, if the vehicle involved was owned by both spouses, or was owned by the spouse who was not involved in the accident, then both spouses would be liable and the real estate could be attached. In Michigan, the party operating the vehicle who was negligent would be liable, and any owner of that vehicle is also liable. That is why we always recommend that each vehicle be titled in the primary driver’s name alone. Owning vehicles jointly creates joint liability and it is unnecessary because vehicles do not need to be owned jointly in order to avoid probate as long as they are under $60,000 in value.
Clients often have a significant amount of their wealth in life insurance policies as well. Again, life insurance is protected under both state and federal law from the claims of creditors.
Another common way to own real estate or other investments is through a limited liability company. If a client owns an interest in a limited liability company as a member, and they are sued by a creditor or claimant, the creditor or claimant can only receive a charging order against the client’s membership interest in the limited liability company. The creditor cannot step into the shoes of the client as a member of the company. This is not particularly attractive to a creditor or claimant because they cannot control what happens with the entity, they are subject to all of the income tax consequences or owning and operating a limited liability company, but do not necessarily receive any corresponding distributions of income from the company. They might well end up with a tax liability for income earned by the entity with no corresponding distribution with which to pay the tax.
When you take all of these assets out of the picture with respect to liability exposure, you might find that you have very limited assets which could be reached beyond your liability insurance. As a result, you may not need to spend a great deal of money on an asset protection trust and potentially lose complete control over those assets in order to avoid liability exposure. The key is reviewing all of this with an experienced estate planner who can assess your particular situation and advise you on how to retitle your assets appropriately to minimize or avoid that exposure. Also, this should be done in conjunction with your insurance agent as liability insurance is always your first line of defense.