Asset Protection Planning – What Level of Protection Do You Want in Your Estate Plan?

James K. Leonard, Attorney
OSBA Board Certified Specialist in Estate Planning, Trust and Probate Law

Earlier this year, the Ohio Legacy Trust Act was enacted, which has significantly enhanced our clients’ opportunity to protect their assets during their own lifetimes. Even before the new law, clients have been able to protect the assets in their children’s inheritances.

What is the purpose of asset-protection planning? In short, it is planning intended to ensure that your assets will be enjoyed by you during your lifetime, rather than by a creditor – or enjoyed by your children (and/or grandchildren) during their lifetimes, rather than wasted by spendthrift behavior, divorce, or creditor attack.

To explore your asset-protection opportunities, let’s consider the case of Bob and Mary, who have two children. Bob and Mary’s assets include their residence, farm, bank accounts (checking, savings and CDs), investment accounts (stocks, bonds, and annuities), and IRAs. Current Ohio law protects their IRAs from creditors, as well as a $125,000 equity interest in their residence for each of them.

Bob and Mary can use the new Legacy Trust to protect some or all of their other assets, so long as certain steps are followed for current creditors. A Legacy Trust is irrevocable (Bob and Mary cannot directly amend it), and its Trustee must be an Ohio individual (other than Bob or Mary) or trust company. Bob and Mary cannot withdraw assets from the Trust, but they are entitled to receive income and principal distributed by the Trustee. Furthermore, they can have the right to veto any distributions (say, to their children) proposed by the Trustee.

If all formalities are followed in the implementation and administration of the Legacy Trust, its assets cannot be reached by Bob’s and Mary’s creditors.

A downside to a Legacy Trust is that Bob and Mary will no longer have “hands-on control” of the trust assets. Rather, the control is in the hands of the Trustee. Bob and Mary are beneficiaries of the Legacy Trust, but they are not directly in charge.

Even apart from the use of a Legacy Trust, which protects assets during both lifetimes, Bob and Mary can use a revocable Living Trust to protect the assets of the first spouse to die. Let’s say Bob is the first to die. The assets in his Living Trust will be protected from Mary’s creditors, and there can be additional provisions to protect against unwanted financial outcomes if Mary re-marries. Without the Trust, there would be no creditor or re-marriage protection for Bob’s assets, other than for his IRA.

What about asset protection for the children (and/or grandchildren)? Even before the Ohio Legacy Trust Act, there have been a wide range of protection levels for children’s inheritances:

Protection Level 1. The child receives their inheritance outright, free of any trust. There is no protection for these assets other than what state law provides, such as Ohio’s protection of IRAs.

Protection Level 2. The child’s inheritance is held in trust for the sole benefit of the child. This significantly protects the assets from divorce, and unless the trust gives the child the power to withdraw assets, it protects the trust assets from creditors. The child can be the Trustee and can make distributions to him/herself for the child’s health, education, maintenance, and support. An Independent Trustee, named by the child, can make distributions for any purpose and in any amount. This means that the trust can be terminated in favor of the child at any time. The child can designate who receives the trust assets at the child’s death. (Alternatively, the child can be given only a “life estate” in the trust assets; the child receives trust income but no principal and cannot designate who receives the assets at the child’s death.)

Protection Level 3. This is like Level 2, except that the child can serve as Trustee only in the management and investment of trust assets. All distributions to the child and other trust details are handled by an Independent Trustee named by the child. Under Ohio law this kind of trust is known as a “wholly discretionary trust.” Besides offering the highest level of asset protection, this trust’s assets are not counted as a “resource” on an application for needs-based government benefits, such as Medicaid.

Asset-protection planning and Medicaid planning sometimes go hand in hand. For example, some of our clients have gifted their farm into an irrevocable trust, retaining the right to operate the farm and receive its income. This technique makes the farm free of the client’s creditors and, after a five-year wait, a Medicaid-exempt asset.

Asset protection and government benefits are both changing areas of law. Therefore, it is difficult to know what laws will be in effect in the future and what provisions will be needed to conform to those laws. To address this reality, trust documents prepared by Wright & Moore increasingly contain provisions (such as the appointment of a Trust Protector) to allow flexibility and revision of key terms after a trust is irrevocable.

In summary, there are several asset-protection pathways. They vary in terms of cost, complexity, and comprehensiveness. If you would like to know more, please contact us.

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