Protecting your assets from creditors can be very similar to reducing taxes in the event of your death. Having worked for something your whole life, you do not want to lose those things on account of poor judgment or unfortunate circumstances that may arise through debt.
Luckily, there are ways to protect your assets in the case that you may fall into debt but these steps take foresight and need to be implemented before the unfortunate series of debt occurrences arise.
With help from financial experts, you can implement an effective ‘rainy day’ plan to keep hold of those important finances that you wish not to lose to creditors. Try taking these steps and speaking to a professional about how you go about undertaking them.
Gifting Your Assets
Gifting your assets means to give them away to a third party. This protects those assets from falling into the hands of creditors as the moment that a ‘gift’ transaction occurs, they no longer belong to you. This means that although you have avoided them falling into the hands of creditors, you no longer have economic control over or interest in those assets as they now belong to another person.
Irrevocable Life Insurance Trusts
Keeping your financial assets in an irrevocable life insurance trust prevents creditors form being able to access finances which are due for your trustee. Often, the trustee will be a spouse and/or children. Filing away money in an irrevocable life insurance trust ensures that those beneficiaries will receive that money without it being subject to the repayment for your own debts. However, these trusts are subject to tax upon your death. Equally, this money cannot be accessed by you, only beneficiaries on account of your death.
Family Limited Partnerships
Family Limited Partnerships are effectively holding businesses for families looking to transfer assets to other family member while attempting to avoid paying high gift taxes. This means that each member within the family limited partnership has their own stake or interest in the amount in the partnership; the stake depends on what has been assigned to them. This money is protected against creditors to a certain extent.
If you were to add $1000 to a family limited partnership which was split in half, assigning half the money to one child, creditors cannot access this money, as it is protected under another child’s name. However, be careful as a charging order can be made against the interests of the person who owes money when distributions from the family limited partnership are made.
Charitable Remainder Trusts
Charitable remainder trusts work because charities are protected by the government to help them earn as much money as possible. Say you have a house that you would like to protect, you can donate this house to a charity. They will sell that house at full market value and will transfer this money into income-producing assets. From here on in, you gain an income from this charity every year until you die. The house is then exempt from your financial record and cannot be accessed by debt collectors as a way to pay off debts. The remaining assets of the trust go to your chosen charity when you die.
Trust deeds work slightly differently and do not actually protect all your assets from creditors. However, it does protect some of your financial assets from falling into the hands of creditors. When you enter a trust deed, the trust you work with calculates the total amount of debt you owe from all debts such as credit cards, overdrafts, store cards, and so on. It brings all these together and works out how much you can pay a month by looking at your income and your necessary expenses.
Following this it sets up a plan to pay this back monthly over a certain period. For example, if you have $12000 debt to pay and you can afford to pay $200 a month, the trust could set this trust deed over a period of three years. After 3 years you will have paid $7200, and the remaining $4800 is written off and protected from those creditors attempting to take it again.
Overall, it is fair to say that there are several ways to protect your assets from creditors attempting to take what you have earned. However, you need to be careful as not to border on fraudulent behavior. Talking to financial experts will help you to work out how best to protect your assets and how to undertake any of these steps.