Asset protection and dynasty trusts

Real Property, Probate and Trust Journal, Summer 2002 by Fox, Charles D IV, Huft, Michael J

C. Co-ownership

Different forms of co-ownership, such as tenancy by the entirety, joint tenancy with right of survivorship, and tenancy in common, may provide some protection against creditors.

D. Exempt Assets

Certain assets are partially or entirely exempt from the reach of creditors under either federal or state law. To the extent feasible, an individual can protect wealth from creditors by concentrating that wealth in exempt assets. For example, most states have a homestead exemption that allows an individual always to retain a certain amount of equity in the individual's residence. Many states exempt the proceeds as well as cash value of life insurance and annuity contract from the reach of creditors. In some states, such as Illinois, the exemption is available only if the insurance is payable to a member of the immediate family or other dependent." Both the Employee Retirement Income Security Act ("ERISA")" and the laws of many states protect qualified retirement plans from creditors. Individual retirement accounts are not subject to the ERISA protections, but are protected under the laws of some states, such as Texas."3

E. Trusts for Disabled Beneficiaries

The most likely potential creditor of a disabled beneficiary is the federal, state, or local agency that provides public assistance to that beneficiary. Over the past ten to fifteen years, public agencies have become more aggressive in seeking reimbursement for the cost of caring for disabled persons. Many states have passed laws that permit government agencies to seek such reimbursement and define the assets available to such agencies. An estate planner must carefully consider these statutes when drafting a trust that is designed to provide supplemental benefits to a disabled person to improve the quality of the person's life without having the entire trust subject to confiscation by a government agency.

III. SOPHISTICATED TECHNIQUES FOR ASSET PROTECTION

A. Limited Partnerships

The family owned partnership has become a popular vehicle for managing and controlling family assets. A typical family partnership is a limited partnership with one or more general partners and limited partners. The family partnership provides a number of benefits, both tax and nontax, including valuation discounts, transfers of value without relinquishing control, and restrictions on further transfer of limited partnership interests.

With respect to asset protection planning, a limited partner's personal exposure for the debts of the partnership generally is limited to his or her investment in the partnership. This limited exposure prevents a creditor of the partnership from reaching the personal assets of a limited partner to satisfy debts owed by the partnership.

A limited partnership also can provide a modest level of protection against creditors of a partner who are seeking assets to satisfy a debt or judgment. Almost every state has enacted a version of the Revised Uniform Limited Partnership Act ("RULPA"). RULPA helps protect the interests of limited partners from the claims of their creditors by mandating an unattractive remedy for the creditors."4