Some people think that asset protection is only relevant when you have a bankruptcy looming in the near future. Nothing could be further from the truth. Attempting to hide your assets when there are known creditors may be classified as ‘fraudulent conveyance’ and may not be effective.

Instead, asset protection is a legal method of arranging your assets in such a way as to make them impervious to a future creditor attack. It is most effective when done ahead of time, with the benefit of thought and planning. Below are 5 scenarios where asset protection would be appropriate:

  1. Protecting Money from Irresponsible Young Children. If a parent dies without a will, or leaves everything in his will directly to the children, then under the New York law, children will receive the money (including life insurance proceeds) at the age of 18. Some may think that this is too early, because lots of children are still irresponsible at that age. Wills and trusts can be written in such a way as to delay the receipt of money until either a specified age, or a specified time in a child’s life (marriage, college graduation, etc).

  2. Medicaid Planning. An elderly person may need to receive long term care in the future (such as home care or nursing home care). In New York City, full time home care and nursing home care costs approximately $13,000 a month. Very few people have sufficient savings to be able to afford this cost for the needed time. As a result, asset transfers either to trusts or directly to children achieve the result of preserving the assets for the family, while making the parents eligible for long term care assistance from the government. To be most effective, these transfers should be done before the care becomes needed.

  3. Special Needs Planning. A child or a relative with special needs may require government assistance for the rest of his life. Yet government programs cover only the most basic needs and parents and relatives may want to enhance the life of the child. There are ways of providing money for a special needs relative in a way that preserves his eligibility for government programs.

  4. Protecting Money from Irresponsible Adults. Some families have members with problems – drug, alcohol, gambling, creditors, etc. Leaving money directly to that person is almost like throwing the money away. Trusts can be written in such a way as to control the distribution of money to a profligate family member, with the result that the money will be protected – both from the person and from his creditors.

  5. Protecting Money from Your Own Future Creditors and Financial Loss. If you are engaged in a business where there is a possibility of you getting sued, then you may want to shield as many of your assets as possible. Moving your assets after the creditor has already materialized may be considered fraudulent and will not be effective. There are many ways to shield your assets: irrevocable trusts, LLCs, corporations, family limited partnerships, trusts in other jurisdictions, etc. The key to protecting your assets is to do so before asset protection becomes a necessity.