The following is a summary of our recent interview with Elizabeth Morgan, which can be listened to on our site here or on iTunes here.
With so many different ins and outs, estate planning — especially for individuals who have greater exposure to credit or litigation risk, or those with high net-worth — can be a daunting task.
This time on our Lifetime Income series, we spoke with Elizabeth Morgan, an estate planning professional and specialist in taxation and trusts at Elizabeth Morgan and Associates, about how individuals can implement different investment vehicles to protect their assets in retirement and inheritance situations.
Who Needs Asset Protection?
In Morgan’s view, everyone can benefit from asset protection to some degree.
“If the value of your assets are capable of being protected in any of the other statutory-exempt categories — retirement plans, life insurance, etc. — then you probably don’t need an asset protection trust,” she said. “But if your assets exceed the exemption level in your particular state — and in some states, that can be fairly low — using an asset protection trust makes good sense.”
For investors concerned about future creditors, establishing a trust in a jurisdiction where, despite their status as the grantor to the trust, their assets would be protected can be hugely beneficial.
The other danger investors need to consider is their exposure to litigation risk. Many groups of people in the US face a greater threat to their assets from litigation, including doctors and celebrities, but also those with a high net-worth.
What Are the Options?
In addition to homestead laws and other forms of protection, retirement plans are fantastic vehicles to shelter wealth from litigation, Morgan stated.
“The way I like to explain it is, if you think about asset protection, think in terms of buckets,” she said. “The goal is to fill each bucket.”
The first tier of the bucket includes statutory exemptions, such as homestead protection, retirement plans, life insurance and annuities, and 529 plans for grandchildren and children, among others.
Next, investors could look to spendthrift trusts for children and grandchildren.
“If our legacy is what we can pass to our children, the sooner we pass it to them where it can’t be taken from us (or them) the better,” Morgan said.
The final category includes protective vehicles, such as limited liability companies, partnerships, and protective trusts.
“You fill those buckets to the extent possible, and if one of your buckets goes down, the whole ship won’t sink,” Morgan said.
What Are the Benefits of Offshore Trusts?
Because of changes to tax law, since 1974, offshore trusts have not been nearly as beneficial as they once were for sheltering assets. Now, the question becomes, why would an investor want to use an offshore trust?
The answer is for asset protection, Morgan stated.
“After 1974, these (foreign) asset trusts were used primarily for global diversification, and to achieve asset protection, because you couldn’t get that in the United States with regard to our legislation,” she noted.
Now, we have a movement in the US where some individual states allow investors to establish an asset protection trust, but because of the “Full Faith and Credit” clause of the Constitution, these trusts may not always be recognized between states.
“Going offshore gives you an asset protection benefit that you don’t have necessarily by being in an asset protection jurisdiction in the United States,” Morgan noted.
Using the trust to get asset protection and other benefits can be great, but the tripwire that individuals have to avoid is tax reporting and making sure that it’s done correctly, Morgan stated. Offshore structures can also help investors achieve greater diversification by holding assets outside of the United States.
The reality, though, is that individuals considering offshore asset protection should consult with a financial advisor, lawyer, and accountant to make sure everything is handled properly.
“From my standpoint, watching the world as it’s changing, the benefit of diversifying out of the United States is in itself valuable,” Morgan said. “The problem is, you have to really think through the tax issues on a multi-jurisdictional basis in order to make sure that you haven’t gone from the frying pan into the fire.”
Listen to this full interview with Elizabeth Morgan on our website by clicking here. Become a subscriber and gain full access to our premium weekday interviews with leading guest experts by clicking here.
