A basic estate plan helps you create a roadmap for the distribution of your estate assets after you death. A more comprehensive estate plan, however, can accomplish much more. Protecting the wealth that you accumulate over the course of your lifetime, for example, is a goal that can be furthered within your estate plan. A Los Angeles estate planning attorney explains three of the most popular wealth protection strategies that you might choose to include in your estate plan.
Wealth Protection Planning Strategies
- Domestic Asset Protection Trust. A Domestic Asset Protection Trust (DAPT) is an irrevocable self-settled trust established under the special laws of one of the limited number of jurisdictions that allow the Settlor (also referred to as the Grantor or Trustor) to be designated a permissible beneficiary with access to the funds in the trust account. As of 2019, only 17 states have DAPT friendly laws. While California is not one of those states, you can set up a DAPT in another state. A properly drafted and structured DAPT prevents creditors from reaching the trust’s assets. If a DAPT were set up under the laws of a non-DAPT jurisdiction, the general rule is that the Settlor’s creditors can access as much of the trust as can be distributed to the trust Settlor. In addition to providing asset protection, a DAPT offers other benefits, including state income tax savings when situated in a no-income-tax state.
- The lifetime exemption and annual exclusion. One of the most potentially devastating threats to your estate assets is the federal gift and estate tax. The tax is effectively a tax on the transfer of wealth that is collected from a taxpayer’s estate after death. The tax applies to the value of all qualifying gifts made during your lifetime as well as the value of all assets owned by you at the time of death. The American Taxpayer Relief Act (ATRA) of 2012 permanently set the rate at 40 percent. That means that your estate could owe almost half of its value to Uncle Sam if you failed to plan ahead. To reduce your estate’s exposure to the tax, make use of the lifetime exemption which allows you to exempt assets gifted during your lifetime or at the time of your death. In addition, the annual exclusion can also help you to transfer a significant amount of assets each year tax-free. As of 2019, the annual exclusion lets you make gifts valued at up to $15,000 to an unlimited number of beneficiaries each year. Strategic use of the exclusion can protect a significant amount of assets from Uncle Sam.
- Long-term care planning. One of the biggest threats to your retirement nest egg is the high cost of long-term care; yet, many people don’t even plan for likelihood of needing that care. When you reach your retirement years, you stand a 50-75 percent chance of eventually needing some type of LTC services, as does your spouse if you are married. Nationwide, the average cost of that care for 2018 was almost $100,000. As you might well imagine, California residents paid, on average, more than the national average for LTC. Because neither Medicare nor most health insurance plans cover LTC expenses, you could be forced to pay out of pocket if you don’t plan ahead. Medicaid will cover LTC costs; however, you must qualify for benefits. One of the most problematic eligibility requirements for retirees is the asset limit. If you own non-exempt assets valued above the (very low) limit, your application will be denied and you will be expected to “spend-down” those assets. In essence, this means you will need to rely on those assets to pay your LTC bills until those assets are depleted. One way to avoid the loss of your retirement nest egg, and protect your accumulated wealth, is to incorporate a Medicaid trust into an overall Medicaid planning component within your estate plan. A Medicaid trust is a specialized irrevocable living trust that protects your assets while helping to ensure that you qualify for Medicaid if you need to in the future.
Contact a Los Angeles Estate Planning Attorney
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about how to disinherit an heir to your estate, consult with an experienced estate planning attorney near you. Contact the Collins Law Group by calling (310) 677-9787 to register for one of our FREE estate planning workshops.