Business owners, like most individuals, want to preserve and eventually transfer family wealth. Operating a business or a private practice can present even greater challenges to ensuring that both personal assets and business interests are safeguarded. Here, we explore the importance of protecting your assets from outside activities as part of a holistic estate plan and the strategies you might consider, including trusts.

Importance of planning

Whether you have built your business from the ground up or inherited the family enterprise, you have likely taken steps and put basic practices in place to protect you and your business, including:

• A business structure that provides the owners of the business with appropriate protection from liability, whether as a corporation, limited partnership or limited liability company
• Regular reviews of financial planning projections for you and profit & loss and cashflow projections for your business
• Periodic evaluations of contracts and insurance coverage with your advisors

Assuming the preliminary work is done, it is now time to focus on wealth transfer and estate planning, which may include asset protection strategies. Take a step back from the day-to-day operations and consider what you want to achieve for your business and your family over the long term. Many times, owners maintain a singular focus on running their businesses and struggle when pivoting to a planning mindset. But at some point, retiring, transferring wealth and transitioning or selling the business will be on the table, and it is important to be prepared for these events.

Reviewing your overall estate plan and deciding whether you are ready to make gifts as part of estate and tax planning are crucial decisions. Financial planning projections will come in handy here. Whether you gift away assets or retain an interest in them, you can use trusts to keep those assets protected from creditors, in-laws and even beneficiaries.

The role of trusts

Trusts are an important part of estate and wealth planning. Under most circumstances, a third-party trust provides significant protection from the claims of creditors of a beneficiary. A dynasty trust offers protection from creditors as well as significant gift, estate and generation-skipping transfer tax savings across multiple generations. In many states, these trusts can be written to exist indefinitely.

Trustees can be given the discretion to make or suspend distributions based on existing circumstances or make distributions to a third party for the beneficiary (e.g., directly to an educational institution for tuition). This ensures the trust can continue to provide a benefit without distributing monies directly to the beneficiary. Under a directed trust, trustee responsibilities may be delegated to specific individuals or institutions. This can be highly useful if you wish for someone other than the trustee to make investment decisions over specific assets in the trust, such as privately held stock.

Asset protection trusts

Self-settled asset protection trusts are not typically designed to eliminate transfer tax. Instead, they are created to provide protection for assets that might be distributed to, or used to benefit, the settlor. Until relatively recently, the law of trusts dictated that a creditor of the settlor of a trust could reach the trust’s assets to the same extent that those assets could have been used to benefit the settlor. However, to date 19 states have introduced exceptions to that general rule. To increase the likelihood that a self-settled asset protection trust is respected for creditor protection purposes, it should be created in a state (like Delaware or Ohio) that has robust domestic asset protection trust statutes in place. These trusts, though frequently includable in the settlor’s estate for transfer tax purposes, offer greater asset protection than would be afforded by individual ownership or ownership through a revocable trust.

A newer development comes in the form of a hybrid asset protection trust. This type of trust benefits individuals other than the settlor, at least initially. These trusts can be written to include the settlor as a beneficiary later in time or perhaps under circumstances over which the settlor has no control. For instance, the trust may permit the settlor to be added as a beneficiary after 10 years have passed or after some contingency has occurred. In this way, many of the issues cited for self-settled trusts can be minimized or even avoided.

Other common attributes of asset protection trusts include discretionary distribution standards, using trust protectors or trust committees and reserving certain administrative decisions to independent or adverse trustees. Each of these features is intended to evidence an additional degree of separation between the settlor of the trust and control over the trust assets and augment the protective nature of the arrangement.

Revocable trusts

By way of contrast, the often-used revocable trust, in which the terms can be changed at any time, offers no asset protection features. Assets held in revocable trust are exposed to creditors in all 50 states. However, revocable trusts do provide a mechanism for management of your assets in the event you become incapacitated or die. It is not unusual for business owners to establish both a revocable trust for assets that fund their lifestyle and an irrevocable asset protection trust for a “rainy day.”

The type of trust created depends on your specific wealth planning needs and goals. It is important to discuss the implications of any type of trust with your estate planning attorney and your relationship team.

Conclusion

Protecting assets for your family and your business requires thoughtful due diligence in the context of a holistic estate planning process. Preserving and transferring family wealth are top of mind for business owners as they also work to grow and maintain a thriving company. Incorporating trusts into the overall estate and wealth plan can be advantageous. We urge you to discuss your concerns with your Relationship Team as well as your attorney and tax advisors.