Six Asset Protection Strategies to Consider | TRUST-CFO®

Six Asset Protection Strategies to Consider

Asset Protection Strategies

Six Asset Protection Strategies to Consider

Your clients work hard for the money they earn and want to make sure it is protected against outside risks like tax consequences, creditors, lawsuits, and market influences. When designing an asset protection plan in California, residents have many choices of how to invest and protect their money. Let’s take some time to go through 6 asset protection strategies that your clients should consider and examine the benefits and disadvantages of each.

  1. ERISA Plan

What is it?
ERISA stands for Employee Retirement Income Security Act of 1974. A qualified ERISA plan can be a benefit plan that will pay a set amount per month at retirement, based on a formula that considers age, number of years worked at the company, and salary, or a contribution plan, which pays the value of your plan based on how much the individual and/or employer contributed to the plan. Within these systems, there are many qualified retirement plans employers can offer including simplified employee retirement plans (SEPs), 401k plans, profit-sharing plans, ownership stock bonus plans, and employee stock plans (ESOPs).

Benefits
Some of the benefits of a qualifying ERISA plan is that the plan is protected by federal law and offers total asset protection to the funds contributed to and paid out by the plan. Other advantages include tax savings and tax deferral benefits, which may differ based on the specific plan an individual has.

Disadvantages
Clients who chose an ERISA plan will have more limitations on their investment choices and the amount that can be put into the plan than other asset protection strategies. Additionally, funds from ERISA plans generally cannot be used until age 59 ½ or required minimum distributions at age 70 ½. Administration costs of setting up an ERISA plan can be high and the process may be complicated and time-consuming. It can also be expensive for employers to obtain the professional advice and assistance needed to provide a plan to employees.  An employer is not required to offer employees a retirement plan, but if they do, they must offer it to all employees. Plan fiduciaries must be careful not to act in their own interests, but in the interests of the plan and its beneficiaries.


2. IRA- Roth IRA

What it is?
IRAs (Individual Retirement Account) and Roth IRAs can be a great way for clients to plan for retirement. The main difference between the two plans is that traditional IRA contributions are tax-deductible and money withdrawn in retirement is taxable at the individual’s tax rate at the time of withdrawal. Roth IRAs, on the other hand, do not receive a tax break for contributions, but withdrawals at retirement are tax-free. It is important to note that an IRA can be converted to a 401k- Roth IRA, but it cannot be converted to a Roth 401k.

Benefits
The benefits and disadvantages of an IRA or Roth IRA depend heavily on the particular details of an individual’s financial situation. The plans can provide asset protection up to $1.28M or higher, based on the discretion of a judge.

Disadvantages
IRAs and Roth IRAs have limitations on investment choices and contribution amounts. They can also be expensive to operate.


3. California Private Retirement Plan

 What is it?
A California Private Retirement Plan (PRP) is an asset protection strategy created under California law that focuses on utilizing an individual’s exemption rights to protect both employer and private funds and assets from lawsuits and creditor attacks. In a PRP, funds are placed in a trust and protected from creditor attachment as long as the assets are designated for your future use in retirement.

Benefits
A great benefit of a PRP compared to other retirement plans is that an individual’s assets are completely protected from lawsuits and creditors. Also, there are no age requirements for withdrawing funds. As long as the trust assets are contributed and used for retirement, an individual can retire whenever they choose to.

Disadvantages
Some of the downside of a PRP are limitations to what type of assets can be placed in the trust and that this asset protection strategy is available to California residents only.


4. DAPT/FAPT

What is it?
Irrevocable trusts can be formed for asset protect domestically in one of 17 states that have enacted legislation allowing for the creation of domestic asset protection trusts (DAPTs) or overseas in a foreign asset protection trust (FAPT). These plans can be effective in protecting assets from creditors, but protection is not absolute and professionals creating these trusts for clients must be careful of fraudulent or voidable transfer implications.

Benefits
These asset protections trusts do provide a significant degree of protection and can have many tax benefits as well. FAPTs give individuals the option of removing their assets to a foreign jurisdiction.

Disadvantages
DAPTs and FAPTs can be expensive to set up and maintain. They may be closely scrutinized for fraudulent or voidable transfers and funds held in FAPTs may be more difficult to control. It is even possible to lose full control of assets in a FAPT.


5.
ILIET- Irrevocable Lifetime Insurance Exemption Trust 

What is it?
Simply put, an irrevocable lifetime insurance exemption trust (ILET) is a holding device for your life insurance policy. Placing a policy into an ILET removes the policy from your estate, providing significant tax benefits.

Benefits
ILETs can provide tax benefits like lifetime exemption to gift assets and protection from estate taxes, while providing beneficiaries a lifetime stream of income.  ILET are not complicated to set up and inexpensive to create and maintain. They can also provide a lien against an individual’s home in the right planning circumstances.

Disadvantages
An ILET should not be your only asset protection strategy, as it only holds life insurance policies and no other assets.


6. QPRT- Qualified Personal Residence Trust
 

What is it?
A qualified personal residence trust (QPRT) allows an individual to remove a personal residence from their estate by placing it into a trust, thereby protecting it from gift tax when transferring the home to a beneficiary.

Benefits
A QPRT allows you to keep your personal home in your family without burdening your beneficiaries with a gift tax that may be prohibitively costly for them. Through a QPRT, you protect the equity in your home and can live there rent-free, taking advantage of all applicable income tax deductions, during the retained income period.

Disadvantages
When the retained income period ends, you must pay rent to heirs at a fair market rate. It can be difficult to sell a home owned by a QPRT. If you do so, you must reinvest the sale proceeds into a new home or receive the payments in the form of an annuity. Beneficiaries will owe capital gains taxes based on your income tax rate when the personal residence was placed in the trust.

When working with a client to create a comprehensive asset protection plan it is crucial to choose between these strategies or use these strategies in combination based on an individualized assessment of your client’s current and future needs and their financial situation and goals. 

6 Asset Protection Strategies your clients should consider 

1-6 strongest to weakest 

  1. ERISA Plan- 401K/Cash Balance/Defined Benefit Plan
    1. Benefits- Total Asset protection, untouchable,  Tax Savings/Deferral
    2. Disadvantages- Limitations on investment choices, expensive to operate, limited amount of $$ put in, Cant be used until age 59 ½ and RMD at 70 ½, Self dealing rules, difficult to operate, must give to employees.
  2. IRA- Roth IRABenefits
    1. Asset protectionup to $1.28M
    2. or up to a judges discretions- Limited contribution amounts
    3. Disadvantages- Limitations on investment choices, expensive to operate, limited amount of $$ put in, Cant be used until age 59 ½ and RMD at 70 ½.
    4. IRA can be converted to a 401k- Roth IRA can not be converted to a Roth 401k
  3. California Private Retirement Plan
    1. Benefits- Can be exempt- No 59 ½ or 70 ½ rules , can retire when desired, Better than protection, it is an exemption like a 401k
    2. Disadvantages- Can not protect all assets, California Only
  4. DAPT/FAPT
    1. Benefits- Removes assets to other jurisdiction, can have tax benefits
    2. Disadvantages- Expensive to  set up and maintain, can loose full control of assets
  5. ILET- Irrevocable Lifetime Insurance Exemption Trust
    1. Lifetime exemption to gift assets and then have it provide you and your wife a lifetime stream of income. This is probably your most legitimate option after a PRP. It is strong and cheap to set up and maintain, equivalent to the PRP. This can also provide a lien against your home in the right planning circumstance. There are also some potential tax savings opportunities depending on other future assets/values. We can setup and administrate this plan if you so choose. Let me know if we need to set up a call to further conversation.
  6. QPRT- Qualified Personal Residence Trust
    1. Benefit- Used only for a your home- Protects to equity in the house
    2. Disadvantage- Give up control of your home- only works if paid off
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