The Order of Estate and Asset Protection Planning

Darol January 27, 2023

The Order of Estate and Asset Protection Planning

A plan is the art and science of understanding a situation, envisioning a desired future, and laying out effective ways of bringing that future about.
US Army, The Operation Process, ADP 5-0.

Introduction

The quote above comes from the Army’s training doctrine. It is a surprising statement because it is almost poetic as it lays out the three components of a plan: 1) understanding a situation, 2) envisioning a desire future, and 3) laying out effective ways to bringing that future about. This post is called “the Order” in reference to the order of steps taken to build the correct legal plan.

Before beginning to plan, you need to first understand the three models of planning. Watch the video below before going onto the first Order.

The Three Money Models

There are three money models: estate transfer, asset protection, and generational wealth-building. When building your own family’s plan, the first step is to determine which of these money models best fit your financial vision. Once the Money Model is determined, you will know which legal documents you need because the documents for each model are different.

Estate Transfer

The word estate refers to the property of a deceased property owner. Estate planning, therefore, seeks to guarantee that property of the deceased asset owner transfers efficiently to the desired beneficiary. The value proposition of estate transfer, therefore, for the plan-maker is not immediate other than the peace of mind of knowing that it is more likely that property will end up in the hands of the loved ones. That aside, an estate transfer plan does not enhance the plan-maker’s life at all.

Estate transfer plans emphasize probate avoidance. Living trusts are often touted as the preferred property transfer vehicles do accomplish this. However, law firms sell living trusts with high price tags. They require work and some expense to fund, and just as much effort to settle. They do not offer a way to permanently bar creditors, and any dispute regarding any aspect of the trust, or any aspect of the transfer of the property of the deceased property owner can only be resolved in court, anyway.

Thirty states have statutes that allow real estate to transfer at death by a Transfer-On-Death Deed. Combined with beneficiary designations forms associated with financial accounts, most estate transfer plans can accomplish the same result, with less expense than a living trust.

Asset Protection

Asset protection refers to the lawful and ethical transfer of property during a lifetime to render the property unavailable to creditors. For example, if you reside in a community property state, you may execute a community property agreement that transfers your share of community property to your spouse as his separate property. This is not considered a taxable gift. It is also not a transfer for Medicaid purposes. If your spouse died shortly after you transferred all of your property, then the property would transfer to the beneficiary named in your spouse’s will. Hopefully, your spouse’s will establish a testamentary supplemental needs trust and name you as the beneficiary. If so, with two lawful transfers of property, all of your property and that of your husband transferred to a trust that is not considered an asset if you apply for Medicaid. Thus, the spend-down rules do not apply. That is asset protection.

Asset protection guards against four threats to wealth: 1) high un-reimbursed medical expenses, 2) unnecessary taxation, 3) property mismanagement, and 4) judgments from lawsuits. The legal documents common in asset protection plans include irrevocable, non-grantor trusts, testamentary trust, a last will and testament rather than a living trust, property agreements, promissory notes, business entity formation documents such as a limited liability company or a family limited partnership, and the use of powers of attorney in specific ways.

Generational Wealth Building

The goal of generational wealth building is to bring a family together to reach a shared vision three or more generations away. Generational wealth building uses all documents associated with an estate transfer and asset protection but relies on family governance to execute the plan. This often occurs within a family business.

What is Your Money Model?

Your money model is either estate transfer or asset protection. Once you see the difference between the two, you will likely know which model best fits your financial vision. If not, no worries. The Academy has an assessment tool that will show you your model, explain why it is the best fit for you, and lay out the steps to implement the correct plan.

Categories: Roadmap

Tags: Key Point

Darol

Attorney. Podcster.

How to Protect Your Wealth in a Time of Crisis

This episode marks the first of 30 daily episodes to help listeners build a true asset protection system. Published on the same date the host’s home state issued a quarantine, stay at home order, the episode describes the emphasis on publication of reliable information rather than perfectly produced podcast episodes.

Learn how medieval lawyers devised the first asset protection trust to save the estates of England during the bubonic plague and how this legal construct still exists today.

Ria March 25, 2020

How to Create a Bullet-Proof Family Bank and Why

In this episode, we will be talking about ways to create the family bank, why it’s important, the benefits and the job descriptions attached to the family bank, which is an irrevocable non-grantor trust, which will protect your assets.

Ria October 19, 2021

The 2020 Secure Act and the Three Money Models To Help You Work Around It

This episode is a legal update with a higher view of planning to include three necessary philosophies of wealth planning to help you make the appropriate decisions. The episode describes the 2020 Secure Act but in the context of estate planning law, dating back to British medieval common law, three other important legal changes in the preceding five years and the new reality of planning with retirement accounts. This episode introduces you to idea of “workarounds”. Yes, that’s right! We can mitigate the negative impacts of the SECURE Act.

On December 20, 2019, President Trump signed the Setting Every Community Up for Retirement Enhancement Act (SECURE Act). The SECURE Act, which is effective January 1, 2020. The SECURE Act has several positive changes: It increases the required beginning date (RBD) for required minimum distributions (RMDs) from your individual retirement accounts from 70 ½ to 72 years of age, and it eliminates the age restriction for contributions to qualified retirement accounts. However, one provision of SECURE nullifies all of the benefits of the act and is a threat to your family’s generational wealth. That is a bold statement, I realize. I stand by it.

The SECURE Act does provide a few exceptions to this new mandatory ten-year withdrawal rule: spouses, beneficiaries who are not more than ten years younger than the account owner, the account owner’s children who have not reached the “age of majority,” disabled individuals, and chronically ill individuals. However, proper analysis of your estate planning goals and planning for your intended beneficiaries’ circumstances are imperative to ensure your goals are accomplished and your beneficiaries are properly planned for.

Most people do not care enough to spend time let alone money on taking specific actions to adjust their plan, if they have one, to account for the changes brought to us courtesy of SECURE. Perhaps, there is nothing wrong with this attitude. If you view SECURE from the perspective of the government, it makes sense. Too much money is being protected for the benefit of families and not taxed. The government and even the economy is better off to get that money back into circulation.

However, I doubt that people decide to pay unnecessary taxes, fees and stand idly by as wealth is lost because they are on the government’s side. During most of my career, I thought this attitude, that action should not be taken to avoid a financial loss, was just a mental hiccup, a cognitive bias that prevents some people from making correct decisions about wealth. However, as I have grown in my profession, I now see that it is more related to one, of three, philosophies about wealth. Unfortunately, the attitude that is passive about protecting wealth is the traditional and, therefore, prevalent model. The reasons it is traditional is all about human longevity. Throughout all of human history, humans have lived short lives. In the Middle Ages, when probate and trust law invented, men lived, on average, to be just twenty-five years. That average age was not doubled until the early 1900s, over a thousand years later. However, in the last century, the average life expectancy of an American male has almost doubled again. Biologically, there are more opportunities and different challenges than the current perspective of the Law even realizes.

The law is reactive, not proactive. As such, the traditional model has only sought to pass wealth from an asset owner to the next generation because the asset owner would live a short life as would the next generation. Life has been so difficult in terms of survival, the Law has simply left it at that. As such,

There are three models in planning, the traditional model is estate planning and views life and, therefore, wealth, as short. The other two models do not. I will refer to these models often and you should always think in their terms because the model you choose will require actions specific to that planning model. If you view the purpose of your money as a simple, outright transfer to the next generation, then estate planning is your swim lane. SECURE Act is not a threat because the estate planning model is not focused on the protection of wealth beyond just your lifetime. However, if you view wealth as the means by which you plan to empower your family for more than your life plus ten years, then one of the two other models are applicable to you.

THE THREE MODELS OF PLANNING

Estate Planning

The objective of estate planning is estate transfer. The word “estate” is a legal term that refers only to the assets once owned by a now deceased person. The Law is reactive, not proactive. Therefore, traditional estate planning limits its objective to the transfer of assets of a person to either a spouse or the next generation in a limited way.

Asset Protection

The objective of asset protection is different. Asset protection, as I define it, includes all of estate planning but has the focus is on the protection of assets while the assert owner, his or her spouse are still alive. The trigger event for estate planning is the death of the asset owner. The trigger event of asset protection is now!

Generational Family Wealth Planning

The objective of family wealth is to strengthen a family around a set of core values and a vision for the future. The assets of a successful family finances the family using all of the tools of estate planning and asset protection but the time horizon is seven generations. There is an entire course dedicated to the devices you used to this model.

Ria February 6, 2020

What A Rooster, A Beach And Earthquakes Taught Me About Resilience, What Is Important And Investing

What would you do if, suddenly, you could not buy food. And you were afraid to sleep inside your home. Your neighbors decided to leave. A man who lived a block away committed suicide? How would you plan for the future if you just lost your job?

A swarm is what geologists call the grouping of earthquakes that have hit Guanica, Puerto Rico. Swarm is as good a name as any to describe over a thousand earthquakes in such a small area, many above 5.0 and at least two above 6.0. While there has not been a “big one”, a single massive quake to bring sudden and dramatic devastation, the constant month-long shaking of the homes, road, stores and spirits of Guanica has been even more cruel if not as renowned.

This tragedy is also headquartered in the one place on earth I intended to call home. I had spent impactful moments there. Playa Santa, just outside of Guanica, was the location of a lovely apartment with a view of the Caribbean. The landlord had my deposit in escrow and only my signature on a lease awaited. I had gone to a remote beach every other day to clean the plastic from it. I yelled at Playa Santan roosters that just had to wake at the playful satanic hour of 4 am. A lot had happened in such a short-time in Guanica and Playa Santa, the launch of this very podcast as one example, that I just had to tell the story of my time there and the friends who still struggle there.

As if on cue, however, the episode does succeed in laying out an investment idea. Really, this idea is an investment method. I first heard of it from a client about a year ago. I keep this method tucked away until the very last moments of the podcast.

Ria January 28, 2020

Introduction

The Three Money Models

Estate Transfer

Asset Protection

Generational Wealth Building

What is Your Money Model?

Related Articles