When planning for your family after you have passed, you should ensure the assets you leave behind are not subject to the claims of creditors. Life insurance is a unique way to protect your dependents, and many state laws protect by exempting insurance proceeds from the claims of creditors. Some state laws even protect policy cash values during the owner’s lifetime.
Added protection can be achieved by owning a life insurance policy within an irrevocable trust. A trust can hold life insurance outside the reach of an insured’s creditors, and this will protect the beneficiaries from paying the insured’s debt with the death benefits received, which could leave them with nothing. A trust can also include “spendthrift” provisions, which may help protect the trust from the claims of the beneficiary’s creditors. These provisions allow the trustee discretion in providing trust distributions to beneficiaries.
Asset protection is not intended to hide money from creditors but to isolate and protect valuable assets from being subjected to several events, such as a lawsuit, asset freeze, or bankruptcy. Asset protection maximizes the allowed exemptions by state or federal law while legally protecting assets.
However, a caveat: asset protection is not intended for hiding assets from ex- or current spouses, business partners, legitimate creditors, investors, and the like. If a person is discovered concealing assets from such entities, they will be subject to harsh punishment by law.
A recent use for asset protection has accompanied the increase in identity theft. By keeping certain assets “under the radar,” there is no way to link protected assets by using your personal information, such as your social security number or unique name. Thus, should you become a victim of identity theft and find yourself without funds while the bank takes months to investigate your case, you will still have the protected assets to live off and will not be severely affected.
There are several ways to utilize asset protection; even if you are not in debt and never plan to be, you would still find great value in an asset protection policy.
Laws vary between states, so it is essential to consult with legal counsel about protections offered in your state.