How does a corporation, Sub “S,: or LLC protect your assets and where does an irrevocable trust such as the superior UltraTrust fit in to your asset protection plan? Is the LLC, Sub “S,” or corporation enough to protect your assets or do you absolutely need an irrevocable trust UltraTrust? My lawyer suggests creating a revocable trust rather than an irrevocable trust so I can control my assets. Is this the best plan for me and will it protect my assets when it comes time to go to court? Can I elect myself as the trustee and what are the consequences?

1. The LLC, the corporation, or the Sub “S” was undercapitalized for it’s intended business purpose or
2. Formalities were not followed or
3. The owner used the LLC, Corporation or Sub “S” mostly for personal purposes or
4. It did not serve a “bona fide” commercial purpose or
5. It lacked in economic substance and was merely an alter ego of the owner whose sole intention is to frustrate the creditor(s) and many other reasons.

A single member LLC (one owner), Corporation, or Sub “S” will not protect the owner or his or her assets because the charging order protection that is highly regarded is based on protecting the “innocent” non-debtor. Only an irrevocable trust such as the UltraTrust with an independent trustee will protect your assets from a past, present, and potential future creditor.

How does the UltraTrust protect your assets? The house you live in, the car you drive, the investments you own are actually owned by an LLC and the LLC, in turn, is owned by the UltraTrust. The irrevocable UltraTrust is a superior irrevocable trust which has stood its test of time. The irrevocable trust, UltraTrust, has seen many legal battles and like a skilled warrior with swift accuracy and litigious force it protected its owner and its owner’s assets.

So what do you need for a superior irrevocable trust to be implemented? Be prepared ahead of time. “Preparation, preparation, preparation.” Just like when you buy a house they say, “Location, location, location.” Asset protection is about reducing the risk, not only from outside creditors, but you need to worry more about the inside creditors such as your spouse, your brother-in-law, damages caused by your minor children, your dog, and your business partners.

A revocable trust is not worth the paper it’s written on since you have the power to void or amend the trust. A trust essentially is nothing more than a contract. If you can void any section of the contract, you have the power to void the whole contract which is what a revocable trust allows you to do. The root word is “revocable.” It’s like allowing a party in a contract to change the contract at will without the other’s consent. Now what is the point of the contract in the first place if the contract or trust can be amended?

Your lawyer most likely suggested the revocable trust because he or she knows that you will need his or her services when you have a revocable trust. It’s not only that you will be able to revoke your trust but your trust will be revoked in court as well! Why would you pay for this insurance of protecting your assets when it will not function as its intended purpose?

Another common mistake in creating trusts is the election of self in a revocable or even an irrevocable trust. Most estate planning lawyers will tell you, that you can write an irrevocable contract, even if you are at the center of the agreement by electing yourself to be the trustee. These lawyers just went to law school to warm up the seats. If you run into one of these lawyers who instruct you to do be a self-elected trustee you should run and don’t walk because their incompetence is going to cost you plenty. If you elect yourself the trustee then you have, in essence, defeated the purpose of assigning your assets to another entity. If you defeat the purpose of assigning and allocating your assets to another entity it means that you, technically and legally, still own the assets. The purpose is not to own the assets so others who are or will be suing cannot access your assets in the first place because you, technically and legally, do not own the assets. Make sense? You can trust the UltraTrust since this irrevocable trust was designed from the ground up with this sole purpose in mind and was designed to protect your assets from attorneys who will try and find a security hole in the trust contract.

Let me say it clearly, unequivocally and without recourse. The power of a trust contract vests with the power of the independent trustee. Period. Your trustee must be independent of you. He or she cannot be related to you by blood or marriage. The greater the independence of your trustee is the stronger your asset protection plan. When you are into court, even by your siblings, spouse, best friend, partner or some other person who wants to garner your funds, you can look at the judge straight in the eye without a smirk on you face and calmly state, “Your Honor, I don’t have any assets.”

Asset Protection and Life Insurance Proceeds bring up some very interesting topics. Many clients believe that because they have a life insurance policy, the cash value of that policy will not be subject to creditors during bankruptcy. While some states do offer protection of these assets, many do not. If you would like to learn how to protect these assets as well as protect the beneficiaries of the policy from creditors, the following article will provide important information.

Asset Protection and Life Insurance Proceeds

Read Part 1: Asset Protection, Bankruptcy, Life Insurance

What happens to the proceeds of a life insurance policy not protected by an irrevocable trust?

When it comes to life insurance policies, many clients will name their children as the beneficiaries of the policy. Very few will question what will happen if the children become candidates for bankruptcy or have significant creditors. If Mom and Dad die and leave the children with $150,000-$300,000 in tax-free death benefit proceeds without the protection of an irrevocable trust, will these proceeds be safe from their creditors or a bankruptcy? Creditors will want the beneficiaries to use the proceeds to pay off the debts they owe.

Section 522(d)(11)(C) of the current bankruptcy code states that a payment that is under a life insurance contract that insures an individual of whom the debtor was a dependent on could be exempt to a reasonable extent for the support of the debtor and any other dependents the debtor may have. In order for this exemption to be applicable, the debtor must have been a dependent of the individual who is insured at the time of the insured’s death.

What would happen if the child was not a dependant? In this case, the proceeds from the insurance would be subject to seizure. This would reflect poor planning and shows why clients should use the UltraTrust® Irrevocable Trust or an Irrevocable Life Insurance Trust (ILIT) for any insurance policy that will eventually be paid out to any heirs. When life insurance policy proceeds are paid to an UltraTrust® Irrevocable Trust or an ILIT (Irrevocable Life Insurance Trust), there will be terms that can prevent the trust from giving any money to the beneficiary if the money is going to be used to pay a creditor, including the IRS.

There are some states in which a cash value policy is already protected from creditors. This occurs in Texas, Florida and Oklahoma, as well as a few other states.

Some States Allow the Cash Value Policy to Protect Assets from Creditors

There are some states in which a cash value policy is already protected from creditors. This occurs in Texas, Florida and Oklahoma, as well as a few other states.

Just as there are some states that will offer some protection of assets, many do not offer this critical protection. This means that is a client is funding thousands of dollars into building a life insurance policy to build a retirement vehicle; the cash in the policy will be subject to loss if creditors seek payment or at the time of death with the estate tax. Without question, an insurance policy should be held within a well drafted Irrevocable Trust like the Ultra Trust®.

Many insurance agents like to use cash value life as a way to help their clients build wealth for retirement, so this is troubling if not done properly. It is even more troubling if the wealth building is being done through Equity Harvesting.

Learning how to protect life insurance policies from creditors during bankruptcy is something every client should be aware of to ensure that some of their assets are in fact protected. Even if your state does not offer protection for these assets, you can use a simple Irrevocable Trust structure to accomplish the same protection. Call Estate Street Partners toll-free at (888) 93-ULTRA or (888) 938-5872 or if you are within the Boston, MA region please call us at (508) 429-0011.