Asset protection strategies estate planners should know

Estate planning is an essential component of comprehensive wealth management. After all, what is the point of building a financial legacy if it will just be wiped away by the government or courts in one fell swoop?

While many people are familiar with asset protection tools such as wills, trust funds and life insurance, these instruments in and of themselves may not be adequate. If you have built significant wealth spread over many asset classes or own a family business, next-level asset protection will be necessary. With this in mind, two major asset protection tools to keep on your radar are DAPTs and family limited partnerships. Continue reading for more information on how these powerful instruments are essential in comprehensive estate planning.

Using a DAPT in Estate Planning

A domestic asset protection trust (DAPT) is a top option for individuals looking to protect their hard-earned wealth from creditors and/or legal claims. A DAPT is a form of irrevocable trust that allows grantors to transfer assets while retaining some control (beneficial interest) over those assets.

In addition, DAPTs can facilitate the transfer of assets to loved ones after the grantor passes on. This guarantees that the grantor’s wealth is distributed as intended and not tied up in probate court and/or eroded by inheritance taxes.

DAPT: Shielding Assets from Creditors

A DAPT can help an individual shield assets from creditors and potential court judgments. By forming a DAPT, the grantor creates a separate legal entity to manage and maintain assets. Once assets are transferred into the DAPT, the trust itself becomes the legal owner of the assets, providing immunity against any personal debts or judgments against the grantor.

DAPT: Minimizing Tax Liability

There are several unique tax advantages associated with a DAPT. Transferring assets to the trust as a completed gift removes them from the grantor’s taxable estate. This can help beneficiaries avoid hefty estate taxes when accessing the trust. Additionally, any appreciation of gifts contributed to the trust is not subject to taxation. Finally, keeping assets in DAPTs can streamline tax filing, reducing complexity and the risk of potential errors for wealthy individuals with diverse assets.

DAPT: Facilitating Wealth Transfer

One of the truly unique benefits of a DAPT is that it can be combined with an LLC as part of an estate planning strategy. When carefully set up by an experienced legal professional, the grantor of the trust can be named as a designated beneficiary and receive discretionary distributions from the trust.

In addition, a DAPT is a great tool for unwed individuals on the cusp of marriage. Assets are not part of the marital estate and are not subject to equitable division upon dissolution of the marriage. They are far more airtight than a premarital agreement, which can often be open to interpretation if not exquisitely crafted.

Using a Limited Partnership in Estate Planning

It is quite common advice: small business owners are often encouraged to form a limited liability company (LLC) to separate themselves from legal action taken against the business.

While an LLC does have many benefits for business owners, did you know that, as an estate planning tool, a limited partnership (LP) is actually more advantageous?

You may be wondering: what is a limited partnership?

A limited partnership is a business structure with at least one general partner and one limited partner. The general partner has unlimited liability for the business’s debts and judgments, while the limited partner has no legal liability and is only financially responsible for their investment in the business. The general partner is responsible for running the business and all business decisions, while the limited partner has no control beyond the amount of their financial investment.

Increasingly, family limited partnerships are being used to grow family businesses while protecting assets and generational wealth. As the laws governing LPs are laid out by statute, they are not subject to interpretation, unlike more subjective operating agreements.

LP: Shielding Assets from Creditors

Because an LP is a form of business, it also enjoys the benefits of business protections. A limited partner is not putting their entire personal financial well-being at risk when going into business with family members.

If the LP falls on hard times, your stake in the business may lose value, but your personal assets are safe. Debtors cannot come after your money to pay off business debts. Limited partners are also protected if family members make poor decisions. If another partner gets into personal debt or legal trouble, their profits from the business interest may be exposed to creditors; however, those of other limited partners are protected.

An LP can help you save on estate taxes. They are structured to take advantage of the gift tax exclusion. This allows you to transfer up to $16,000 per year of partnership assets tax-free.

LP: Facilitating Wealth Transfer

By using the gift tax exclusion, you can slowly transfer wealth to your loved ones each year. It is also a great tool for training family members to take over a business once you retire. The slow distribution of business interests ensures numerous financial benefits over transferring them all at once.

Protect Your Legacy with a DAPT and Limited Partnership

DAPTs and family limited partnerships are powerful tools for protecting hard-earned wealth. Reach out to an experienced estate attorney today to keep what is rightfully yours!

Visit ColoradoBiz today to take the next step toward strengthening your financial future: Minimizing Tax Liability

John Skabelund is a nationally recognized attorney at Ultimate Asset Protection with extensive experience in asset protection across the United States. His clients appreciate his ability to simplify complex topics, earning him a reputation for having the heart of a teacher.