How employees and business owners can benefit from asset protection
When employees and their families are faced with bankruptcy and foreclosure, they can benefit from effective protection devices. Professionals, including physicians, attorneys, dentists, accountants and engineers, should also take advantage of asset protection vehicles because they are more susceptible to being the defendants in a lawsuit. In California, professionals have personal liability for acts or omissions stemming from their practice.
People often mistakenly believe that a living trust will offer protection from creditors. Although living trusts provide significant benefits, including the avoidance of probate, they do not protect individuals from creditors. There are other types of trusts and estate planning tools that can help safeguard your assets from creditors.
One such estate planning vehicle is a qualified personal residence trust (QPRT), which is a trust that can shield your home from creditors. A QPRT is a trust that transfers your main irrevocable home or a vacation home to your children while you are alive. Once you have transferred the home to your children through a QPRT, your creditors will be unable to reach the home because you will no longer be the owner.
Upon establishing a QPRT, you will be able to sell your current home and purchase a new one while realizing the tax advantages associated with home ownership. In addition, a QPRT provides you with the legal right to keep living in your home. The QPRT will state the number of years during which you have the right to reside in the house and enjoy all the income tax advantages of home ownership. Upon expiration of the term of years, you will still be able to live in the house in return for making rental payments to your children.
The QPRT offers additional tax advantages. While transfers made while the grantor is alive might be subject to gift taxes, transfers made after the grantor’s death are subject to estate taxes. A QPRT will allow your children to realize a considerable reduction in gift taxes owed, and all subsequent increases in the value of your home will be excluded from your estate. Thus, the appreciation of your home will be free from estate tax upon your death. It is important to keep in mind that in order for an asset protection vehicle, such as a QPRT, to be effective, it must be implemented prior to a creditor claim or lawsuit being filed.
Small business owners can use asset protection vehicles such as corporations, partnerships and trusts to shield their business and personal assets. An effective asset protection plan can discourage a potential claimant or help prevent the seizure of assets following a judgment. Among the strategies used in asset protection planning are legal structures, including corporations, partnerships and trusts.