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Asset Preservation Planning Basics


June 1, 2017

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6 minutes


Preserving wealth for future generations is a primary estate planning objective. Most often, estate plans are designed to emphasize the reduction of the effect of taxes on a client's estate, incorporating certain basic ideas concerning distribution of assets. In determining how much will ultimately inure to the benefit of your heirs, you need consider not only what the effect of taxes is on your estate, but whom your creditors are and what rights will exist in those creditors on your death. The Internal Revenue Service is but one of many possible creditors. Increased litigation, divorce, environmental claims, malpractice and other potential creditors may be substantially more damaging to your ultimate estate than taxes. In light of this, asset preservation planning is an important element of estate planning and cannot be left to chance. Such planning is not just for the "wealthy."

Where Is The Risk?

Before designing or implementing an estate plan to protect assets, it may be necessary to identify the potential types of liability. You may be liable on a contract, resulting from both direct and indirect obligations. You may enter into either written or oral contracts, obligate yourself under a bank loan, or even incur gambling debts. You may guarantee loans, or you may incur liability as a general partner in a partnership. Additionally, you may incur liability as a result of a certain tort action. Again, your obligations may be as a result of either direct or indirect action. You may act in a negligent fashion, or you may commit professional malpractice. You may indirectly incur an obligation as a result of liability as a general partner, or, with respect to professional malpractice, incur liability as a result of being a partner with an individual who commits malpractice. Finally, either state or federal law may impose certain liabilities upon you or your estate. By way of example, you may incur liability for either spouse or child support, liability for environmental problems, or liability for any and all types of taxes.

Beware Of The Fraudulent Conveyance

The one thing you must be careful of is to ensure that your proposed plan does not involve a fraudulent conveyance. If it does, the plan will not provide the protection which you are seeking. Not only that, but violation of the fraudulent conveyance laws may subject you to both civil and criminal liability. In order to avoid engaging in a fraudulent conveyance, you must be able to distinguish between existing, probable, possible and remote creditors. However, in any situation, planning that renders you insolvent will most likely be ineffective as an asset protection device. If you do your planning as early as possible, and plan in segments so that fewer and fewer assets are exposed over time, you may partly avoid the issue.

Each situation must be viewed separately as facts and circumstances play a key role. The main issues to be reviewed for determining whether the transfer is ultimately fraudulent are:

  1. The timing of the transfer as it relates to the timing of insolvency;

  2. Whether the creditor existed, was likely or was merely possible at the time of the transfer; and

  3. The relationship of the transferor and the transferee.

Additionally, you must consider the actual intent to hinder, delay or defraud, adequacy of consideration, openness of the transfer, and retention of control over the transferred property. Even in the absence of actual fraud, it is still possible to appear fraudulent if:

  1. The transferor is insolvent or rendered insolvent;

  2. The transferor is left with an unreasonably small amount of capital; or

  3. The transferor is about to incur debts beyond his ability to pay.

The circumstances at the time of any contemplated transfer pursuant to an asset protection plan must be considered.

What Is At Risk?

Now that you have identified the risk, you should determine which assets will in fact be at risk. As a general rule, assets which are held in your own name or held in your revocable (living) trust, or assets over which you have a power to cause distribution to yourself (such as a general power of appointment or right of withdrawal), are generally at risk. Note that under certain circumstances, a creditor may not be able to force you to exercise the power of appointment or right of withdrawal. Assets which are not in your name are generally not at risk. With respect to corporate assets, while corporate assets may not be at risk, your shares of stock in a corporation may be. Finally, there are certain assets which are protected or exempted by law. The death proceeds of a life insurance policy will generally be protected, provided the proceeds are not payable to the insured's estate, or to a trust which is obligated on the insured's liabilities on death. With life insurance, however, protection during lifetime is not necessarily achieved. Under federal law, the bankruptcy code permits an exemption for only $4,000.00 of cash value on a life insurance policy.

While the U.S. Supreme Court has held that qualified benefit plans under ERISA are outside the reach of a bankruptcy trustee or any other third party creditor, the same cannot be guaranteed for assets which are held in IRAs or similar plans which are not qualified ERISA plans. Some states grant protection. Of course, once the assets are distributed, they will be subject to your creditors. The bankruptcy code sets forth a long list of additional assets which may be exempt from bankruptcy creditors. To the extent bankruptcy is a possibility, this list of exempt assets should be studied closely.


Timing is important, as planning done immediately before or any time after a liability becomes set, increases the likelihood that the planning will be set aside as a fraudulent conveyance. There are many estate planning tools that can be utilized in order to accomplish estate asset protection and asset preservation. Prior to engaging in any complete estate plan, you should work closely with your advisor to ensure the greatest protection of your assets and preservation of those assets for your family members. We would be pleased to assist you in beginning this important process.

Copyright © 2000 Levenfeld Pearlstein. This article contains general commentary on legal matters. It should not be relied upon as a substitute for legal advice as to any particular situation.

Circular 230 Disclaimer
In conformity with U.S. Treasury Department Circular 230 this document and any tax advice contained herein is not intended to be used, and cannot be used, for the purpose of avoiding penalties that maybe imposed under the Internal Revenue Code, nor may any such tax advice be used to promote, market or recommend to any person any transaction or matter that is the subject of this document. The intended recipients of this document are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this document.

Filed under: Trusts & Estates

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