Asset protection planning is something many people put off because they believe it’s too soon to construct a legal fence around their assets, shielding property, accounts, and investments from claims.
Waiting can be costly, exposing hard-earned assets to loss through liability lawsuits and claw back provisions in Medicaid. An experienced estate planning attorney can show how establishing an estate plan can protect your assets now and in the future.
Assets Worth Protecting: Your Life’s Work
Assets that can be protected through an estate plan include the following:
- Rental property
- Business interests
- Investment and brokerage accounts
- Cash value of life insurance policies
Retirement and 401(k) accounts are generally protected by state and federal law, but they can be incorporated into a comprehensive estate plan that makes the funds available for expenses while establishing a long-term plan for heirs to receive the remainder.
Protecting Assets Before They’re Lost
Protecting assets through estate planning tools is only effective if they’re in place before a legal threat materializes. Transfers made to protected accounts after a lawsuit is filed are likely subject to a challenge under Illinois fraud law.
Transfers of assets that are made with the intention to delay or defraud creditors can be clawed back. Under the state’s Uniform Voidable Transaction Act assets can be made available for courts to award to a victim. Likewise, transferring title to a rental property after being served with a lawsuit can be reversed.
Domestic Asset Protection Trusts
Some states offer Domestic Asset Protection Trusts but Illinois does not. However, residents seeking protection of assets while still benefitting from them may establish such a trust in another state. Note that states that offer DAPT options, like Nevada, Ohio, South Dakota, and Delaware, have two- to four-year seasoning requirements (a mandatory period of establishment). The protections are still untested in Illinois courts.
Homestead exemptions in Illinois protect up to $15,000 of equity in a primary residence ($30,000 for jointly-held property) from creditors but it only applies to property already designated as a homestead. Making a homestead claim in the midst of a legal claim will not hold up.
Be Aware of Retirement Account Vulnerabilities
Most qualified retirement accounts, including IRAs and 401(k)s, have strong creditor protection built in. However, there are circumstances under which that protection may not be absolute, including if old employer plans are not rolled over into IRAs, or early withdrawals are made to pay debts. Both of these situations may expose a retirement account to creditors.
Triggers for Probate Costs and Family Disputes
When a person dies without a will, Illinois probate laws determine how their assets are distributed. This can mean distributing significant portions to an estranged spouse or providing nothing to a stepchild who was not legally adopted. Probate is a time-consuming and sometimes expensive process that opens records of assets to the public.
Failing to leave a will is one of two common yet significant estate planning mistakes that people make, and failing to update beneficiary designations is another. Divorce, remarriage, and deaths of beneficiaries are major life events that should prompt revisiting beneficiaries on life insurance and retirement accounts. If not updated, a former spouse could inherit assets intended for other family members.
Illinois Business Owners Are At Particular Risk
Small businesses in Illinois should be structured as a Limited Liability Company (LLC), corporations, or family limited partnerships to protect their personal assets from business liabilities. Beyond the legal designation, proper recordkeeping is essential to maintaining that barrier. If separation is not maintained, courts may “pierce the corporate veil” and allow creditors access to claims on the owner’s property.
A Guide to Understanding Asset Protection Planning
A consultation with a professional business and estate planning attorney at Legacy & Life Law can help you identify the best asset protection options available for your situation. Set up your consultation today.