Asset Protection

Many people include estate planning tools aimed at minimizing taxes or transferring property to loved ones. While those are important, they do not address all potential vulnerabilities. Economic instability, a divorce, or a failed business can all endanger your assets. Other common but often overlooked threats include the rising cost of long-term care, the risk that a son or daughter-in-law could benefit from your family wealth in the event of a divorce, or the possibility that a beneficiary is not capable of managing an inheritance wisely. These risks may seem unrelated, but all have the potential to reduce or eliminate your financial legacy if not planned for carefully. Asset protection strategies exist to address these specific risks and more.

Asset protection is the process of using legal structures and estate planning tools to secure your assets from liabilities, legal claims, and other financial threats. The primary purpose is to ensure that the property and wealth you leave behind is preserved for those you intend to benefit. These strategies help minimize the chances that creditors, lawsuits, or other outside influences will diminish your estate. In doing so, they protect both your peace of mind and your beneficiaries’ financial futures.

Numerous estate planning tools can be used to safeguard your assets. Trusts, for example, are frequently used to separate personal ownership from assets, placing them under the control of a Trustee. Some states offer homestead exemptions that shield a portion of your home’s value from creditors. Retirement savings plans, including 401(k)s and IRAs, often have creditor protection built into them under federal or state law. For business owners, forming a corporation or a limited liability company can provide a legal barrier between business obligations and personal property. Gifting assets during your lifetime can also reduce the size of your taxable estate, potentially lowering tax liability and placing assets out of reach from future threats. It is important to note, however, that gifting your assets during your life can have unintended tax consequences to your beneficiaries.

Trusts are among the most versatile and effective estate planning instruments. There several types of trusts including testamentary trusts, which are created through your Will and take effect only after death, and living trusts, which are active during your lifetime. Trusts can be revocable or irrevocable. An irrevocable trust is especially powerful for asset protection because once assets are transferred into the trust, they are no longer owned by you and therefore cannot be claimed by your creditors. Even a revocable trust, which allows you to maintain control and make changes, can include features that protect assets. For example, a spendthrift trust includes language that restricts a beneficiary’s ability to access the funds, making it difficult for creditors to reach those assets or for the beneficiary to misuse them. Another tool is a Domestic Asset Protection Trust (DAPT), which allows you to be both the creator and a beneficiary of the trust. Although only available in certain jurisdictions, and not in Maryland, DAPTs offer strong protection by limiting access to the assets by future creditors while still allowing you to benefit from them.

In many cases, yes. Federal laws provide creditor protection for certain types of retirement accounts, especially those governed by the Employee Retirement Income Security Act (ERISA), such as 401(k) plans. Individual Retirement Accounts (IRAs) may also be protected, although the level of protection can vary depending on your state’s laws. In Maryland, retirement funds are generally protected from creditors, although there are some exceptions.

Owning property jointly can provide a level of protection, but it depends on how the ownership is structured. For instance, “tenancy by the entirety,” which is available in some states, including Maryland, for married couples, offers protection from creditors of just one spouse. On the other hand, owning property jointly with an adult child or another family member could expose your share of the property to their financial problems. If that individual faces a lawsuit or incurs debt, their creditors might pursue the jointly owned property. For this reason, it is critical to choose the type of joint ownership that aligns with your goals for asset protection.

If you own a business, your estate plan should include provisions that protect both your personal and business assets. This could involve forming a legal entity like a corporation or an LLC to limit personal liability. A well-drafted operating agreement can help clearly delineate between personal and business assets. Carrying sufficient insurance is another essential step. In addition, planning for the eventual transfer of your business to a successor through a business succession plan helps avoid unnecessary sales or financial disruptions upon your death or incapacity. Keeping the business financially stable and well-structured is critical to preserving both the business itself and your personal estate.

Yes, reducing your taxable estate is one way to protect assets from federal and state taxes. The IRS allows you to gift up to $19,000 per person (as of 2025) each year without incurring gift taxes or reducing your lifetime exemption. You may gift that amount to as many individuals as you wish annually, which can gradually move substantial wealth out of your taxable estate over time. Other advanced estate planning tools, such as Grantor Retained Annuity Trusts (GRATs) and Family Limited Partnerships (FLPs), can also help reduce estate tax exposure while retaining some control over your assets.

Planning should ideally begin long before any financial threat arises. Once a lawsuit or creditor issue is on the horizon, your options become significantly limited, and courts may view your asset transfers as fraudulent. Starting early allows you to establish legal structures and strategies that are more likely to hold up to scrutiny and protect your estate from future risk. Delaying can result in lost opportunities and increased exposure. If you are concerned about protecting your assets against long term care (LTC) expense, any Trust for that purpose should be established at least 5 years before you might need LTC. Since no one really knows when that is, age 55-60 is a good time to consider this type of planning.