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ASSET PROTECTION STRATEGIES:
Individuals are entitled to hold certain property exempt from the claims of most creditors. Exempt property includes a person’s homestead, regardless of its value; eligible personal property having a fair market value of no more than $60,000; pension and profit sharing plans; IRAs and the cash value and proceeds of life insurance and annuity contracts.
Family limited partnerships (FLPs) have become a valuable planning tool for moderate to wealthy families. To form a FLP, there must be at least one general partner and one limited partner. Typically, both husband and wife would serve as general partners. Children or trusts could serve as limited partners.
While the discounts attributed to interests in FLPs for tax purposes are important when considering the appropriate vehicle to own and manage assets, protection of assets from outside influence is usually the primary reason they are used. Among the reasons the FLP is viewed as a viable, practical vehicle for asset protection are:
1) Flexibility of operations
2) Continuity of management
3) Consolidation of assets
4) Positive method of control
Self-Settled Revocable Trusts: Generally, a person may establish a trust to own property, and transfer ownership of the property to a trustee to hold in trust. From a legal standpoint, the trustee (and not the transferor) then owns the property. If the transferor retains a power of appointment over the property or is otherwise able to revoke the trust, the transfer is ineffective for asset protection. However certain states (Alaska, Delaware and North Dakota) and foreign jurisdictions have enacted laws that enable an individual to transfer assets to a trust for the benefit of himself and his family, and have the assets held in trust and outside of the reach of creditors. These laws generally provide that, so long as the transfers are not made to defraud current creditors, the assets held in the trust are creditor proof.
Partition of spousal property: The separate property of a spouse is not liable for claims against the other spouse. Thus married couples can agree to partition assets so as to establish certain property as the separate property of each spouse. Separate record keeping and segregation of funds is imperative to maintaining the effectiveness of this technique. Additionally, there may be substantial estate tax disadvantages to a partition of community property into separate property. One spouse may not possess sufficient funds to fully fund the bypass trust, which utilizes the unified credit of the first to die.
Limited Liability Companies (LLC): One entity that offers insulation from personal liability, exemption from double taxation, and flexibility is the limited liability company (LLC).
An LLC is an entity formed under state law to conduct a business or investment activity. It is created by filing articles of organization with the appropriate state agency in a manner similar to a corporation. An LLC is often recommended to serve as the general partner for family limited partnerships.
ANNUITIES AS INVESTMENT VEHICLES
While an annuity has value as an asset protection vehicle, as an investment vehicle, there are several drawbacks.
- If you are putting after-tax dollars into an annuity, you are converting capital gains taxable at 15% into ordinary income, since all withdrawals are taxable at ordinary income tax rates.
- There are layers of fees, often totaling up to 3% or more per year, effectively wiping out much of the including:
- A fee for the fund (sub-accounts)
- Insurance costs (mortality and expense risk)
- Administrative
- Bail-out fees
- Surrender charges generally start at 7% of your assets and decline by 1% a year thereafter. Some annuities, particularly equity-indexed annuities, have surrender charges that start as high as 20% and stick around for well over a decade.
Instead, max out your 401k and IRAs to get tax deferral without the steep annual fees. If you still want a variable annuity, Fidelity, T. Rowe Price and Vanguard sell lower-cost options.
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