The Difference Between Asset Protection and Tax Planning

By Dave Zumpano, Estate Planning Law Center

Over the last decade, a lot of confusion has occurred with individuals in understanding the difference between asset protection and tax planning.  Many people who come into our office want to avoid taxes.  Many others want to protect their assets from the government, lawsuits, nursing homes and family predators.  The difference though, is rarely understood. 

There are two types of tax planning, minimizing income taxes and minimizing estate taxes.  Since most people interested in tax planning are retired, they're more concerned about estate planning than income tax planning.  With the passage of the new economic recovery act in January, the question of estate tax planning has finally been settled.  The laws of 2001 that had been set to expire twice have finally been made permanent.  What do they mean?  Quite simply, individuals will not owe a Federal estate tax unless they die with assets in excess of $5,250,000.00.  If you are a couple, you can die with $10,500,000.00.  Since this has been made permanent, the need for estate tax planning has virtually been nullified for 99.5% of Americans.  For the one-half of a percent with taxable estates, tax planning strategies are still available.  For the rest of us, asset protection planning becomes even more relevant. 

Asset protection planning is actually less restrictive than tax planning.  Tax planning requires you to create trusts that require you to give up your right to your assets, your right to control them and your ability to change the trust.  Asset protection planning doesn’t.  In an asset protection trust, you can be the Trustee.  You can distribute assets to anyone you choose, and you can even change it.  The one restriction on an asset protection trust is you must give up your right to that which you want to protect.  For example, if you want to protect your assets (i.e., a CD), the CD could go into the irrevocable trust and you would agree never to be able to get the CD back.  But, you can still retain the rights to all the interest earned on the CD and you could still invest the CD any way you want and use the CD as Trustee to purchase a home or other asset you could benefit from.  What would be prohibited?  The only thing prohibited would be that you cannot liquidate the CD and give it back to yourself directly.  It can only be utilized on an asset you purchase that you benefit from or to be distributed to someone else in the family or whomever you intend to benefit.   

So, it's important to realize tax planning is really no longer the tail wagging the dog, but rather asset protection planning from nursing homes, lawsuits and predators really has become the predominant planning tool in this new estate planning environment.  It's important to note a revocable living trust does not provide asset protection until after you die and, even then, only if you set it up to do so.  The majority of plans we review do not do what the person who created them thought.  It's important you understand the differences and get your current plan reviewed to determine if it accomplishes your goals and objectives. 

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