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California Asset Protection

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What is asset protection?

During our younger years, often, there is a focus on saving money for life's major milestones such as purchasing a home, funding your or your children's education, or retirement. As we move along our financial journeys, the focus can often turn to the growing wealth we've started to accumulate. Once you have accumulated enough wealth, preserving your hard-earned money becomes essential. Your assets might be lost instantly through a lawsuit, even if the lawsuit wasn't your fault. Even after you're gone, threats to the assets that you've left with your loved ones may continue. For instance, many people may lose half if their spouse decides to divorce them after obtaining their inheritance.

You can use key strategies to protect yourself and your loved ones from these threats. These strategies often work only if prepared in advance long before a threat becomes real. So, well-planned asset protection becomes real.

How to protect your assets while living?

California law allows the creation of a private retirement plan (PRP). A California PRP is not just a financial plan. With the assistance of a professional, you create a private retirement trust, retitles assets, and a written actuarial plan.

This Californian law protects these assets, so you can use them later in retirement. In simple terms, you identify certain assets as "retirement assets" and protect them legally to prevent creditors and others from seizing them in bankruptcy and non-bankruptcy situations. With enough savvy planning, your PRP can help preserve proposition 13 rights, include a tax mitigation strategy- helpful for business owners, and more. It is recommended to consult your attorney to take full advantage of the benefits of a PRP.

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How to use risk management planning to prepare for unexpected circumstances?

If you're retired and have enough income and assets to support you, you may want to consider insurance to protect yourself. You can use life insurance to decrease estate taxes and create a life insurance trust where the policies exist outside of your estate. Another scenario where one may benefit from life insurance is if you rely heavily on your spouse's pension and social security benefits to fund your retirement. If your spouse passes away, you may only receive a portion or nothing of what you previously had. Life insurance can replace these original financial sources.

Another common risk management strategy is long-term care insurance. If you or a loved one is diagnosed with a severe illness and requires expensive medical treatment, this insurance can mitigate costs. There are many options, such as a standalone long-term care policy or one combined with your life insurance. Determine your goals or discuss your concerns with your financial advisor if you need additional assistance.

Ways to pass your wealth safely to future generations?

Trusts are essential to preserving your wealth for your children and grandchildren. If you have a high net worth, this wealth may be subject to an estate tax once you pass. This tax can eat away at your assets. Transferring your wealth to a trust can help prevent this loss and help preserve your wealth for future generations.

An inheritance can be at risk of unanticipated threats. Creditors, predators, and divorce proceedings can eat away at your loved ones' inheritance. If you take legal steps before you pass away, you can protect your legacy.

What is an asset protection trust?

An asset protection trust (APT) is a financial-planning trust vehicle that holds an individual's assets to shield them from creditors. Asset protection trusts offer the most robust protection you can find from creditors, lawsuits, or any judgments against your estate.

There are two general types of asset protection trusts:

  1. Domestic Asset Protection trusts
    1. Domestic trusts are established according to the law of a US state, as opposed to an offshore jurisdiction. Numerous states have aggressive laws while allowing individuals to enjoy the relative stability of the US.
  2. Foreign Asset Protection Trusts
    1. Foreign asset protection trusts are also known as "offshore" trusts, e.g. Cook Islands, Nevis, Caymans, Seychelles and other popular jurisdictions.

What are the benefits of asset protection trusts?

  1. Protect Assets from Lawsuits and Creditors
    1. Because it is a separate entity from the creator, it cannot be taken to fulfill the creator's obligations. See below for additional information.
  2. Safeguards assets for beneficiaries
    1. You can prevent creditors or predators from removing funds from the trust in the case for your beneficiaries assigned to the trust.
  3. Privacy
    1. It's not filed with the state and instead an internal agreement drawn up by an attorney. Except with the IRS, there is no public record of it.
  4. Lower taxes
    1. In specific circumstances, an asset protection trust can eliminate or reduce the requirements of state income taxes.
  5. Flexibility and control
    1. You can assign who is the beneficiary and the trustee of the trust. The creator can also adjust who occupies these roles.

How to protect your inheritance assets in different circumstances?

Taking the initiative to protect your assets only takes a little extra effort in the estate planning process.

If you are concerned about your heir's spouse possibly taking advantage of the inheritance you meant for someone else, you can take specific actions to ensure it benefits your heir. A lawyer can help you set up a trust with your heir as the beneficiary, the person who will benefit from the wealth. In this, your heir cannot herself withdraw any money, only the trustee you named. You can set it up so that only a certain amount of the inheritance is removed periodically so they can live comfortably without your heir or another individual spending it all away at once. Their spouse cannot pressure them to take out all the inheritance as your heir was blocked from accessing the money.

Why would you want an Inheritance Protection Trust?

If appropriately constructed, trust money is also safe from creditors, bankruptcy, lawsuits, and divorce. This is because your heir technically does not own this asset, and so it cannot be seized in these scenarios.

Another benefit of an inheritance protection trust is that it can be added in your Revocable Living Trust. Most Californians draft a Revocable Living Trust to direct their assets to their desired beneficiaries and plan for taxes upon death. Therefore this may make it easier to set up an inheritance protection trust.

How can you protect your retirement accounts from divorce or predators?

Inherited retirement accounts are no longer protected from predators after the Clark vs. Rameker ruling.

In this 2014 landmark case, the United States Supreme Court ruled unanimously that inherited retirement accounts are no longer considered "retirement accounts" and are no longer protected from your beneficiaries' creditors. This has made asset protection planning even more crucial.

Obtain additional expert advice on asset protection

Asset protection can be a complex field to navigate with evolving laws and regulations. Hiring an expert can help ensure that your financial protection strategy is satisfactory and preserve your wealth through retirement and legacy.