Asset protection is the process of shielding your property or assets from claims by lawsuits or creditors by placing them, most often, in irrevocable living trusts. This means that they are no longer under your ownership, and thus cannot be claimed by those you owe money to in the future.
However, when doing so you have to be careful, or you might fall foul of South Carolina’s fraudulent conveyance laws, which might undermine your efforts to protect your assets. In this article, we explain:
- How irrevocable living trusts can help protect your assets from different types of creditors.
- What fraudulent conveyance or transfers mean in South Carolina and how to avoid them.
- What an irrevocable life insurance trust is and the advantages it offers South Carolina residents in terms of taxes, asset protection, and estate planning.
What Are Irrevocable Living Trusts And How Do They Protect My Assets?
An irrevocable living trust is an asset or estate planning measure you can take to shield your assets from claims by lawsuits or creditors. By taking these assets or properties permanently outside your ownership, they are effectively protected against all but the most extreme cases (notably, claims by government creditors).
However, you are not allowed to move assets into a trust after learning that they are at risk from a specific lawsuit or creditor claim. That is considered fraudulent conveyance and can result in the assets being forcibly withdrawn from the trust.
How Does South Carolina Define Fraudulent Transfers And How Can Individuals Avoid Them In Asset Protection Planning?
A fraudulent conveyance is a transfer into a trust made by someone who has a current creditor that they know about or a pending lawsuit they are aware of. For example, if you have a car accident or any kind of situation that you know or suspect might result in a lawsuit against you, it is too late to start putting assets into a trust for protection.
In other words, in South Carolina law, if you already know that you will or might owe these assets to creditors, it is too late to put them in an asset protection trust. A court can undo that transfer if they prove you were already aware of the specific risk or claim against you when you transferred ownership to the trust.
This means the best way to avoid any such challenge against your irrevocable living trust is simply to transfer the assets or property you are concerned about protecting into it well before any such risk or claim emerges. The sooner you do so, the less the risk of it being invalidated later by a fraudulent conveyance claim.
Can Asset Protection Planning Help Protect Assets From Nursing Home Costs Or Other Long-Term Care Expenses In South Carolina?
Asset protection via irrevocable living trusts can also be an effective means of planning for expensive later-in-life health care costs such as nursing homes. Such care is increasingly expensive and is best handled by Medicaid, but such programs are only available to those who fall under a certain income threshold which many families will struggle to fit into.
Transferring your assets into an irrevocable asset protection trust can remove them from your net wealth, and thus help you enter into that important category. However, there is a five-year look-back period for Medicaid and nursing homes in effect in South Carolina. This means that any gifts, transfers, and so forth, including establishing or transferring assets into irrevocable living trusts, during the last five years are still considered against your eligibility.
In other words, after you create a trust and fund it with your assets, it can still be undone for five years. After five years pass, however, then no one can touch them, not even the folks at Medicaid. This means the best time to start thinking about your long-term care needs is yesterday and the best time to act is now.
Can Individuals With Existing Estate Plans In South Carolina Modify Them To Incorporate Asset Protection Strategies?
Some families may already have some estate planning measures in place. Generally, these are not incompatible with asset protection measures like irrevocable living trusts. While you certainly could modify an existing family trust to make it irrevocable, it might be a better strategy to create a new asset protection trust.
Having an irrevocable trust alongside your family trust means you could transfer the most critical assets from the family trust into the asset protection trust. This could give you the advantages of both, without some of the disadvantages that come from dealing with only one type of trust.
Can Asset Protection Strategies Help Protect Businesses And Professional Practices In South Carolina?
Asset protection measures are not exclusively for families and individuals, they can also help protect your business. The owner of the business can create an irrevocable asset protection trust where the business itself is the one placing assets into it (the trustor), and business assets can be placed in that trust.
Remember, however, that the person who manages the trust (the trustee) cannot be the business owner. The trustee must be a separate entity such as, for example, a bank trust department.
What Is An Irrevocable Life Insurance Trust And How Does It Function?
An irrevocable life insurance trust (or ILIT) is a trust that is created to be the owner of a life insurance policy. The life insurance policy can be on the life of the trustor of the ILIT, and the beneficiaries of that trust could be the family, children, or whomever the trustor wants to get the benefits of that life insurance policy.
The primary reason for creating an irrevocable life insurance trust is to avoid estate taxes. Of course, right now there is an $11 million exemption for estate taxes, so unless you are that wealthy, there would be no need for an ILIT. If you are, however, it can be an excellent way of avoiding losing part of your estate to taxes because an insurance policy owned by the trust is not in your estate.
What Are The Primary Benefits Of Establishing An Irrevocable Life Insurance Trust?
The primary benefit of establishing an irrevocable life insurance trust is to avoid estate taxes on the creator or the trustor of that trust because it does not go into the trustor’s estate. This allows for a very large insurance policy that will not be in the estate.
Additionally, the beneficiary of that trust will be most likely the family of the trustor, so it is another way to spread out the legacy you pass on over the long term for your family rather than provide one large lump sum upon death. Finally, the trust can also be instructed to cover expenses, such as funeral expenses, sparing the family an unexpected burden during an already difficult time.
What Assets Can Be Placed In An Irrevocable Life Insurance Trust?
The only asset that can be placed in an ILIT is a life insurance policy. The trust will then be the owner of that policy. The policy will be on the life of the trustor and the beneficiary of the policy is the trust. The trust then dictates how that money is divided among the family of the trustor.
How Does The Establishment Of An Irrevocable Life Insurance Trust Affect Estate Taxes?
The primary reason for having an irrevocable life insurance trust is to avoid estate taxes by keeping the insurance proceeds out of the estate of the trustor. If you are concerned about your estate tax situation or about protecting your assets from creditors while you are alive, you should consult an attorney who has considerable experience in both estate planning and asset protection.
For more information on the Benefits Of Asset Protection Planning In SC, an initial consultation is your next best step. Get the information and legal answers you are seeking by calling (864) 271-7940 today.