One of the most important reasons to create a comprehensive estate plan is to ensure that the assets you leave behind are used to provide for your family and loved ones after you are gone. Of course, if you don’t protect your assets while you are here, however, there will not be any assets to leave for your loved ones when you are gone. This is why assets protection is often included as a secondary goal when creating an estate plan. Although you may not realize it, there are a number of common threats to your assets that could significantly decrease the value of your estate if ignored. One popular strategy used to protect assets is to transfer them into a trust; however, only the right type of trusts offer asset protection. Knowing whether irrevocable or revocable trusts can help protect your assets is essential when creating your estate plan.
Recognizing Threats to Your Assets
Like many people, you may not have given the need to protect your assets much thought because you fail had no reason to consider the various threats to those assets. In truth, however, no one is completely immune from threats to their hard-earned assets. For example, consider the following common threats that could jeopardize your hard-earned assets:
- Major illness or injury — unfortunately, none of us know when we are going to suffer a major illness or injury that requires hospitalization and/or a significant amount of time off work. Even if you have disability and health insurance, if the illness/injury is serious enough you may suffer a considerable loss of income and incur substantial medical bills. If you have valuable assets available you will not qualify for any help covering those expenses and will be forced to liquidate assets to pay the bills.
- Creditors — An economic downturn, a business failure, or your own incapacity could all put your assets at risk. In addition, if you co-sign a loan for a spouse, child, parent, or other loved one, your assets could be at risk if the primary borrower defaults on the loan.
- Your Divorce – New York is an “equitable division” state when it comes to the divisions of assets and debts in a divorce. Although non-marital assets should be safe in a divorce, people frequently co-mingle non-marital assets without even realizing it which can put those assets at risk in a divorce.
- Divorce of a Beneficiary – How can someone else’s divorce threaten your assets? Most often this occurs when you gift assets to a married adult child and then that child goes through a divorce. Those assets could end up in your (now ex) son-in-law’s or daughter-in-law’s hands.
- Long-term Care Costs – You and/or your spouse may need long-term care at some point in the future. The longer you live, the better the odds of needing long-term care. At an average yearly cost of over $130,000 in New York, your hard-earned assets could be at risk unless you can qualify for Medicaid benefits. Medicaid, however, may expect you to rely on your hard-earned assets first before helping you to cover those costs. A specialized type of asset protection planning known as “Medicaid planning” can help protect your assets while still ensuring that you qualify for help from the Medicaid program.
- Spendthrift Beneficiaries – Most families have one – that one family member who simply cannot be trusted with money. Maybe it’s because of an addiction problem. Maybe he/she is just horrible at managing money. Regardless of the reason why, gifting assets outright to a spendthrift beneficiary is a sure way to put those assets at risk
Revocable vs. Irrevocable Living Trusts
All trusts fall into one of two categories – testamentary or inter vivos, more commonly referred to as “living, trusts. A testamentary trust is a trust that does not activate until the death of the Settlor (the creator of the trust). A living trust, on the other hand, becomes active as soon as all formalities of creation are met. Living trusts are then further divided into revocable and irrevocable living trusts. A revocable trust is one that can be modified or changed at any time and for any reason by the Settlor whereas an irrevocable trust cannot be modified or revoked by the Settlor for any reason once the trust takes effect.
Which Type of Trust Provides Asset Protection?
Revocable trusts do not offer asset protection benefits because the key to asset protection is legally removing the assets from your estate. The assets you transfer into a revocable living trust can remain accessible to you because of your ability to modify or revoke the trust whereas assets transferred into an irrevocable living trust become the legal property of the trust. This, in turn, provides the asset protection benefits you want. Because the assets are out of your reach, they are also protected from the reach of creditors or other threats. When structured correctly, however, an irrevocable living trust may still be able to provide you with financial benefits.
If you have questions or concerns regarding revocable trusts and how one might fit into your estate plan, please join us for an upcoming free seminar or contact the experienced New York estate planning attorneys at The Law Offices of Kobrick & Moccia by calling 800-295-1917 to schedule your appointment.