Estate Tax Update - Part 3/ Asset Protection

Asset Protection is really risk management to discourage potential creditors from collecting from those protected assets. Asset Protection is not an exact science and the strategies used to protect assets are more like multiple layers of protection. There are several analogies that come to mind, the layers of an onion is one and a bit longer one is thinking of protected assets as placing a treasure in a metal box and placing a lock on the box. Now you put the box in a concrete room, with a steel door and a strong lock. This room could be located in a castle with a thick, high stone wall surrounding it. Around the wall is a moat and in the moat are crocodiles and, well I think you get the idea. Unless the creditor is very determined and able, they will rather go after easier treasure and leave the protected treasure alone.

The reason I bring the subject of asset protection up in this discussion of the new estate tax law is that some people will tell you that now that there is a $5 million estate tax exemption and portability of that exemption, that 99% of the public will no longer need to utilize trusts. I find two problems with this thinking.

First, is the fact that this legislation is temporary. The new tax laws have been passed for the next two years only and something will need to be done before December 31, 2012 or the law will sunset back to 2001 levels ($1 million estate tax) . There is a chance that the law will be ratified and continue on for the foreseeable future, however, there is just as great a chance that, the limits will be lowered even to the $1 million level.

Second, is the fact that there are other reasons aside from estate tax avoidance to utilize a credit shelter/family trust. Some of these reasons are:
1. Protect assets from lawsuit against the surviving spouse.
2. Protect the surviving spouse should he/she remarry and the new spouse needs to enter a nursing home.
3. Prevent the surviving spouse from unintentionally disinheriting children of the decedent.
4. Protect the growth in value of the deceased spouse's property during the life of the surviving spouse from future estate tax.
5. Allow flexibility for the surviving spouse to manipulate his/her income taxes after the first spouse's death.
6. If the law sunsets in 2012, we go back to 2001 rules.