When meeting with clients and assisting them with an estate plan, I am frequently asked questions about asset protection. This seems to be a more common occurrence with clients who are business owners, those who own commercial real estate, or are doctors, lawyers or in another profession, and may be at a greater risk of being sued. Given our litigious society, asset protection planning has become an increasingly integral part of estate planning for clients. Asset protection planning uses strategies and techniques to protect your assets from potential creditors, while still maintaining as much control as possible over your assets.
There are some general concepts that are important for you to know:
- Planning must begin before a claim or potential liability arises. I have received that frantic call from a client being sued or concerned about being sued. Unfortunately, at that point it may be too late to protect assets. All states have certain laws prohibiting what’s called fraudulent transfers or fraudulent conveyances.
- Asset protection planning and estate planning are not always easily coordinated. Making gifts to children or heirs may make sense in the estate planning context, but may constitute fraudulent transfers if made for asset protection purposes.
- Avoid commingling personal assets and business assets. Business entities such as corporations, partnerships and limited liability companies are meant to be vehicles for commercial operations, and are not intended to be a personal bank account to protect assets. You should also avoid placing personal assets into a business entity. It is imperative that business owners respect the separate identity of the business and maintain the integrity of the company. Failure to maintain a certain separation will increase the risk for the business to be pierced by a creditor through the alter-ego theory.
Even with these concerns, there are some relatively simple steps that you can take to protect assets under Michigan law:
- Make sure that your vehicles are titled only to one person. For instance, instead of having the title to a car held jointly by you and your spouse, it should instead be in the name of the person who uses it most. This also includes motorcycles, motorhomes, and even watercraft. Use the same strategy with vehicles driven primarily by your children.
- Under Michigan law, with the exception of federal tax liens, a creditor of your spouse cannot reach your interest in entireties property, otherwise known as tenants by entireties protection. This applies to all ownership of real property (and certain real property interests such as a land contract vendor’s interest or mortgage interest) and certain types of personal property, including certain investments like bonds, stock certificates, and brokerage accounts. Without an expression of contrary intent, the transfer of real property to a husband and wife will be deemed to have created a tenancy by the entireties. However, keep in mind that upon the death of one spouse, the property will become the sole property of the surviving spouse and become subject to all pending judgments and other claims that may exist against the surviving spouse.
- Maintain sufficient liability insurance, which should include your home, cars, watercraft and other motor vehicle insurance, as well as insurance related to the risks associated with your profession or business. Also, consider an umbrella insurance policy.
- Shelter as many of your assets as possible in a qualified retirement plan. After the U.S. Supreme Court case of Patterson v. Shumate, 504 U.S. 753 (1992), assets in a qualified ERISA plan are outside the reach of a participant’s creditors. Note that assets in Individual Retirement Accounts do not receive the same protection as an ERISA qualified plan. Pursuant to most recent case law, IRAs are not protected outside of bankruptcy, due to the preemption of federal law as it applies to non-ERISA plans, such as IRAs. In the bankruptcy context, IRAs are offered limited protection under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Public Law 109-8, April 20, 2005.
- Life Insurance can be another way to protect and pass assets on to certain beneficiaries. Under Michigan law, creditors cannot reach certain family beneficiaries’ interests in policy proceeds, except to the extent necessary to recapture premiums paid on the policy which were paid with the intent to defraud creditors.
Clients with significant wealth and/or extraordinary risk may wish to consider more sophisticated asset protection planning methods, such as the establishment of a “family” limited liability company or creation of domestic or offshore asset protection trusts. In addition, more states are enacting legislation for the establishment of domestic asset protection trusts. To ensure that your assets are protected or if you have any questions on asset protection, talk with your attorney about the best options to match your needs.
Mark E. Kellogg chairs Fraser Trebilcock’s Business and Tax Law practice, and has devoted his nearly 30 years of practice to the needs of family and closely-held businesses and enterprises, business succession, and estate planning. In addition, Mark is a certified public accountant. He holds several leadership positions for legal organizations dealing with business, agriculture, estate, trust and probate law. He also currently serves on the Board of the international organization of Attorneys for Family-held Enterprises (afhe) and is President of the DeWitt Public Schools Board of Education. Contact Mark at 517.377.0890 or mkellogg@fraserlawfirm.com.