How an Asset Protection Plan Can Minimize Your Estate Taxes
An asset protection trust is an estate planning vehicle designed to protect your assets from creditors, minimize estate taxes or help you qualify for government programs such as Medicaid. As a probate lawyer for Yolo County, CA from a firm like Yee Law Group can explain, individuals who face a significant risk of being sued, such as doctors, use this type of trust to protect their assets from future litigation. If your estate is significant, an asset protection trust can also help minimize estate taxes. While not recognized nationwide, domestic asset protection trusts are currently allowed in 17 states, each of which has slightly different rules.
Common Trust Assets
While this is not an exhaustive list, typical trust assets include:
- Real estate
- Recreational boats and airplanes
- Limited liability companies (LLCs)
- Business assets
An estate attorney can help you determine which assets, if any, to include in your asset protection trust.
Federal Estate Taxes
The estate tax rate can be as high as 40% for anything over the current exemption amount. However, since an asset protection trust exists outside your estate, it is not subject to estate taxes which could be significant if you have a large estate.
The probate process can be lengthy and complicated, but an asset protection trust allows your beneficiaries to skip the probate process for any assets that exist within the trust.
As asset protection trust is irrevocable, meaning that once it is established, the assets are there to stay. If the estate tax exemption increases beyond the value of your estate, the estate will not pay any taxes anyway. Before establishing this type of trust, be sure you are aware of all the facts.
The estate tax exemption is currently over $11 million per individual, so an asset protection trust won’t be necessary to minimize taxes unless your estate is larger than that. Also, If you have set up the trust to qualify for Medicaid, but you don’t end up using it, you have unnecessarily tied up your assets and put them under someone else’s control. The same is true if you want to protect your assets from future litigation and the suit never happens. As with any financial decision, you must weigh the benefits against the risks.
An asset protection trust can minimize your estate taxes. However, unless your assets exceed the current estate tax exemption amount, this type of trust will not benefit you for tax purposes. There are many ways to structure your estate to meet your needs while best serving your beneficiaries. Contact your estate planning lawyer to learn about all the options available to you.