Although we all hope for a financially successful future, you never know what can happen. Illness may strike, industries experience setbacks, and a pandemic can cause huge downturns. The result can be a huge financial liability that may expose your personal and business assets to creditor claims and judgments. In addition, some professionals, including doctors and surgeons, attorneys, business owners, and CPAs, face a higher risk of lawsuits and may need asset protection to safeguard their hard-earned wealth.
Asset protection is a component of financial planning that seeks to protect one’s assets from creditors. Businesses and individuals use asset protection techniques to restrict creditors’ access to certain valuable property while operating within the debtor-creditor laws. At the Law Office of Dionna Reynolds, LLC, we understand that setbacks can happen to anyone and can help you implement strategies that minimize the impact of the unexpected.
Certain business structures can protect your estate from higher taxes and limit your personal liability in the event that you lose a lawsuit.
Family Limited Partnerships
In Illinois, a Family Limited Partnership (FLP) is a business entity designed to hold family investments or a family-owned business. They can reduce estate and gift taxes when wealth is transferred from one generation to the next and protect assets from the consequences of death, divorce, or litigation.
If you invest in a partnership as a limited partner, you can only be sued for the amount you invested, nothing more. Creditors cannot hold you personally liable for a claim made against the business.
In general, corporations provide strong asset protection for their owners unless you fail to treat it as a separate entity or allegedly commit acts of egregious fraud. Otherwise, you can’t generally be held liable if the company loses a lawsuit.
Limited Liability Companies
Limited liability companies are also designed to shield your personal assets from seizure if the company is successfully sued. They also face fewer requirements for compliance than corporations and your earnings aren’t subject to double taxation in the way that C-Corporations are.
Irrevocable Living Trusts
With irrevocable trusts, there is generally no going back once the agreement is signed, but asset protection is one of the benefits you receive in exchange for relinquishing control.
Once placed in a trust, your assets are protected from seizure by creditors. For example, if you have run up significant debt and a creditor gets a judgment against you, they can’t attach the assets in the trust because technically that property is not yours and not under your control.
Estate Tax Reduction:
When property is transferred into an irrevocable trust, it is no longer included in your taxable estate, so you won’t have to pay estate taxes on it. This can result in considerable savings.
Irrevocable Life Insurance Trusts
Irrevocable life insurance trusts (ILITs) can help you avoid large estate taxes on your life insurance policy and preserve a greater value for your beneficiaries. Life insurance policies, and the benefits paid when you die, are typically included in your estate for tax purposes, but ILITs assume ownership of the policy while removing the proceeds from your taxable estate.
Q. Are Domestic Asset Protection Trusts Allowed in Illinois?
Many states recognize Domestic Asset Protection Trusts, which protect the contents from creditors while allowing the settlor (the party who set it up) to retain access to the assets. However, Illinois is not one of them.
Many Illinois residents will set up an LLC in states where these trusts are allowed, grant ownership of certain assets to the LLC, and then make the trust the LLC’s owner. This arrangement essentially makes the trustor the LLC owner. If you are contemplating this strategy, speak to Attorney Dionna Reynolds for advice on how to proceed or possible alternatives.
Q. How Do I Protect My Assets for Medicaid Purposes?
Proper Medicaid planning includes transferring your assets into a trust, but not just any type. Assets in a revocable living trust, for example, are regarded as available to pay for care costs and therefore included in the calculation of your resources unless an exemption applies.
Any trust created for Medicaid planning purposes must be irrevocable so that the assets it contains are not considered available to you. Assets in a special needs trust are also regarded as unavailable to the beneficiary, and therefore do not impair your eligibility for means-tested benefits like Medicaid.
Q. Are My Annuities Protected from Creditors in Illinois?
If you have life insurance, annuity contracts, or endowment policies in place, their cash value and any death proceeds are generally exempt from creditor claims and lawsuits, as long as the money is regarded as reasonably necessary for your support and that of your dependents.
Attorney Dionna Reynolds can go over these types of assets with you and explain which ones may be exempt from seizure. Should you have any property that doesn’t have this type of protection, she can recommend the right structure and strategy to minimize the negative financial consequences of a lawsuit.
Helping You Protect Your Hard-Earned Wealth
At the Law Office of Dionna Reynolds, LLC, we work with clients to conceive and implement proven strategies that will help protect their wealth and safeguard their assets against potential litigation, judgments, and liens, while also arranging for these assets to pass on to heirs when the time comes. The exact strategies we use may vary depending on your situation, the nature of your assets, and the tax regulations that apply to them. For more information or to schedule a confidential consultation, call 708-981-3344 or contact our office online.