What is Asset Protection?
For a married couple, asset protection could consist of transferring assets into the name of the one who is not involved in the business or profession that is the likely source of liability. It could also involve creating an irrevocable trust by one person for the benefit of others, such as for a spouse and children.
Creating trusts in and transferring assets to an asset protection favorable jurisdiction may be considered. Many states have enacted favorable laws relating to asset protection. It is no longer necessary to exclusively seek a foreign jurisdiction outside of the United States to accomplish asset protection goals.
If the likely source of liability is from the operation of a business, it may be possible to create a limited liability entity, such as a corporation of limited liability company, to insulate personal assets from claims relating to the business.
Asset Protection planning does not protect assets from existing creditors or claims. The Massachusetts Uniform Fraudulent Transfer Act prohibits transfers of assets for the purpose of avoiding a current claim or debt. Consequently, asset protection planning is designed to address potential future but currently unknown claims or creditors.
Irrevocable trusts may still be used to protect assets and trust beneficiaries from future uncertainties, such as unforeseen creditors, spouses of beneficiaries in the event of divorce, and a beneficiary’s nursing home costs.
In recent years, MassHealth has attempted to find ways to count assets (known as trust “principal”) held in an irrevocable trust when determining eligibility for benefits to pay nursing home costs. If a person, referred to in a trust as the Donor, Grantor, or Settlor, creates an irrevocable trust, and if there are any circumstances under which the trust principal can be made available to that Donor, the value of the assets making up the principal that are available to the Donor is included in the eligibility determination. After a series of MassHealth “fair hearings”, as well as some court cases, it has not been made entirely clear which powers or set of powers renders trust principal available.
The term “available” means that the Trustee has discretion to distribute principal to the Donor. Generally, the more control and ownership rights a Donor retains, the greater the chance that MassHealth will take the position that the trust principal is available to the Donor. Therefore, it is prudent to carefully weigh the advantages and disadvantages of each retained power when creating and funding and an irrevocable trust. See www.irrevocabletrust.info for several MassHealth fair hearing decisions that illustrate this concern.
Notwithstanding this lack of clarity over the past few years, on April 15, 2016, the Appeals Court of Massachusetts offered guidance on how an irrevocable income-only trust may continued to be lawfully used to protect assets in the event of a future nursing home stay. In the case of Eileen M. Heyn, personal representative v. Director of the Office of Medicaid, 89 Mass. App.Ct. 312, the Appeals Court reversed a Superior Court judgement as well as the decision of the MassHealth Board of Hearings and found that the irrevocable income-only trust that was the subject ot the case was valid and effective to protect the nursing home resident's trust assets.
Irrevocable trusts customarily include a “spendthrift” clause. This clause is intended to protect beneficiaries other than the Donor from having their interests in the trust attached by future creditors, including by a spouse in the event of a divorce. Three 2016 Massachusettts cases addressed whether or not a beneficiary’s inheritance via an irrevocable trust could be considered a marital asset upon the beneficiary’s divorce. See Pfannenstiehl v. Pfannenstiehl (2016 Massachusetts Supreme Judicial Court); Heystek v. Duncan (2016 Massachusetts Appeals Court); and Huff v. Huff (2016 Massachusetts Appeals Court). In the event of a divorce, a Probate and Family Court Judge is given a great deal of discretion to determine the “equitable division” of marital property pursuant to M.G.L. Chapter 208, Section 34. The primary issue in these cases was whether or not a discretionary trust created by someone other than the parties to the divorce could be included in the marital estate, and consequently, be subject to an order for equitable division. In the past, a court might consider the existence of such a trust when awarding marital assets since there could be a possibility of future assets and income available to a divorcing party that could affect the need, or lack thereof, of marital assets and income. But with a properly drafted fully-discretionary spend-thrift trust, a court could not order the trustees of the trust to distribute trust property to an ex-spouse as part of the divorce. An attempt was made in these cases to count trust property as a marital asset. Although the attempts were not successful, it appears that the use of a fully discretionary spend-thrift trust may no longer be as strong a protection as it used to be, and choices such as the number of beneficiaries and the identity of the Trustees take on greater importance when drafting a trust. It is also wise for a beneficiary to enter into a pre-marital agreement with his or her prospective spouse, if possible, rather than rely solely on the terms of a spendthrift trust created by someone else for his or her benefit prior to or subsequent to the marriage.