Cummings & Lockwood Estate Planning FAQs

Our judicial system is as fair as it can be, but it is inherently unfair in a significant way: it is often expensive to defend against unwarranted claims.  It is no secret that society has become highly litigious and this is unlikely to change.  This is in large part due to litigation services based on a contingency fee.  In an ideal world, the contingency fee model would wean out frivolous claims because an unsuccessful attorney would not be reimbursed for costs and billable time.  However, the “success” of the plaintiff’s attorney is often achieved with a settlement before an expensive trial.  Of course, the success comes at the expense of the defendant, who chooses to pay a known amount than risk the possibility of paying a much higher amount, potentially a catastrophic amount.  Therein lies the purpose of asset protection planning: to obtain negotiating leverage against a future unforeseeable creditor by using local state law to protect exempt assets and using other laws, whether domestic or foreign, to protect nonexempt assets.

This question should be rephrased as follows: “When can I not engage in asset protection planning?”  Answer:  You usually cannot engage in asset protection planning when a claim is brought against you or you are aware (or should be aware) that a claim could be brought against you, especially if the value of that claim in the least favorable light (i.e., the worst-case scenario) exceeds the value of your assets that are available to satisfy the creditor’s claim.  Thus, if you have assets that you do not wish to be exposed to creditors’ claims (whether a judgment or a negotiated settlement), you should strongly consider asset protection planning while you only have future unforeseeable creditors.

From an asset protection perspective, there are three types of creditors: 1) a present creditor, 2) a future foreseeable creditor, and 3) a future unforeseeable creditor.  The first two types of creditors are protected by so-called fraudulent transfer, fraudulent conversion, and voidable transaction laws, which protect the property rights of creditors (i.e., the ability to collect on a judgment).  A future unforeseeable creditor is one who could not be known or identified at the relevant time.

It would seem that future creditors are always foreseeable for those who work in high liability professions.  However, most states do not define “foreseeability” in this hypothetical manner.  For example, one would think that an OBGYN could never engage in asset protection planning because of the sheer possibility of committing malpractice during his or her career.  Rather, to be foreseeable, the OBGYN would need to be aware of a specific patient who could bring a specific claim for malpractice.

State law usually determines what assets are exempt from creditors’ claims.  Because laws differ from state to state, one should carefully review the current exemptions granted under his or her state law.  The following are classes of assets that may be exempt under state law:

• Retirement plan assets, including, but not limited to, Individual Retirement Accounts (IRAs), Roth IRAs, Simplified Employee Pension plans (SEPs), and 403(b) annuities.  401(k) assets are exempt under ERISA (Employee Retirement Income Security Act), a federal law.
• Life insurance on one’s life, whether the cash surrender value, proceeds upon death, or both.
• 529 Plans.
• Annuities.
• Homestead property (that is, one’s primary residence).  A handful of states fully protect homestead property.  For example, in general, Florida law protects Florida homestead property from forced sale as long as it is within the size limitations, which are up to 160 acres of contiguous land if located outside a municipality or up to a 1/2 acre if located within a municipality.
• As between spouses, tenancy by the entireties property is exempt from a creditor of a single spouse.  Tenancy by the entireties property is more commonly permitted in real estate but several states permit it in personal property, such as vehicles, and intangible personal property (e.g., financial accounts and interests in entities like corporations, partnerships and limited liability companies).

No, because the grantor of the trust (that is, the person who transfers property to the Revocable Trust) has retained the power to revoke the trust.  The law permits the grantor’s creditors to reach the assets of a trust to the maximum extent a grantor has the power to control the assets.  Since the grantor can revoke the trust, all of the trust assets can benefit the grantor at any time.