As many (or some) are already familiar, there are revocable living trusts for estate planning.  There are also various types of Irrevocable Trust to meet other special circumstances, such as asset protection.

The Domestic Asset Protection Trust (DAPT) originally started in Alaska in 1997, followed by South Dakota (1983) and is an irrevocable trust established under one of the jurisdictions that allow the settlor of the trust to be a discretionary beneficiary and protect trust assets from the settlor’s creditors.  Usually a DAPT must comply with the following requirements:

(1)  the trust must be irrevocable and spendthrift;

(2) at least one resident trustee must be appointed;

(3) some administration of the trust must be conducted in respective state;

(4) the settlor cannot act as trustee.

One of the common rules is that there is a statute of limitations period determining how long the assets need to be in the trust before any new creditor issues arise, however existing creditors typically would be able to access the funds, due to a tolling of the statute of limitations.  Many states do have exceptions as well, such as divorcing spouses and child support requirements.

As an example, the current (2015) state rankings of DAPTs can be found here, and it lists the top five as Nevada, South Dakota, Tennessee, Ohio, Delaware, and Missouri (yes, I know that is six…Delaware and Missouri were tied, besides, we are licensed in Missouri, so I couldn’t leave that out!).

These rankings change as laws change, for example, in 2013, Oshins named Ohio as the top place for DAPTs (prior to that, Ohio was unranked).  This was primarily driven because they created the shortest statute of limitations for DAPTs at 18-months, with most of the other states having either two or four years, with the only two states that have a lower statute of limitations (Utah in 12th place and Virginia in 13th place) both having state income taxes, resulting in a far lower ranking.  If I had to guess, if Utah removed the income tax for the DAPT, they would probably move to first place.  As you can see, there are differences in income tax, statute of limitations, exception creditors, and preexisting torts exceptions.

One reason states are making asset protection a larger priority is because they want the assets to stay in (or come to) their states.  They do not want to lose the assets.  One example is that after about a decade, South Dakota had amassed about $75 billion in out-of-state trust assets.   This is important for business, jobs, and tax revenue.  As of April 2013, Delaware institutions brought in 90% of the fiduciary fees, generating $600 million to $1.1 billion in fees for Delaware.

One other type of trust that is becoming more popular after a the Supreme Court ruling on June 12, 2014, in Clark v. Rameker is a retirement trust.  The Supreme Court determined that assets in an inherited IRA (Individual Retirement Account) is not protected from creditors.  To provide the protection against creditors, the retirement trust has grown considerably since then.  Even if you do not consider yourself affluent or wealthy, you should at least discuss a retirement trust with your attorney to determine if it is something you would be interested in.

As you can see, there are numerous methods to protect your assets.  For most people, it is having proper insurance and possibly a retirement trust.  For affluent and wealthy people, it may be a good idea to consider other avenues of protection beyond liability insurance.

What happens if you or your passengers are seriously injured by someone that has very low insurance limits or no insurance?  Your Bodily Injury coverage does not protect you.  If that is the only coverage you have, you will need to deal only with the other persons insurance company and what they are willing to pay (I’d suggest speaking to a personal injury attorney very quickly, I actually recommend it for any injury accident).

The first coverage that may provide protections for you and your passengers is Medical Payments coverage.  This is an optional coverage that many people do not purchase.  This protects you and your passengers regardless of fault for up to your Medical Payments policy limits (typically they range from $1,000 to $100,000 per person).  There is no need to go through health insurance and your automobile insurance pays for the medical expenses.  This means that if you (or your passengers) are injured in an accident, you can deal with your own insurance company and they will take care of the medical expenses (up to your policy limits).  If the Medical Payments limits are high enough to cover all of the medical expenses and the other (at-fault) party does not have insurance, then your UMBI (Uninsured Motorist Bodily Injury) coverage still has the full limits to provide for pain, suffering, lost wages, etc.

What many people do not realize is that they cannot protect themselves for more than they protect other drivers from their own negligence.  This means that if you only have $25,000 in Bodily Injury Coverage, your Uninsured Motorist Coverage is limited to only $25,000.  However, if you have $1,000,000 in Bodily Injury Coverage, you are able to also have $1,000,000 in Uninsured Motorist Bodily Injury Coverage, protecting you and your passengers up to those limits for someone else being negligent.  This provides coverage for medical bills, pain & suffering, lost wages, and essential services just as if the other person had $1,000,000 in Bodily Injury coverage.

The third type of insurance is disability insurance.  A lifetime disability caused by an accident or illness can quickly and easily drain savings and require you to empty bank accounts or sell homes.  Does the disability require home care?  Are you no longer able to work?  Do you have new and continuing medical expenses?

The last type of insurance is life insurance.  If you have a family that is dependent on you for support, then you should probably have a life insurance policy.  Keep in mind that even if something were to happen to you, their needs continue.  Living expenses, education expenses, medical expenses all continue and a properly established life insurance policy can take care of your loved ones.  The life insurance can pay to your spouse/children, or you can have a trust established that can hold and manage the funds as needed to protect the long-term needs for your loved ones.

In Part 3, we will explore protecting wealth.

This series will cover a wide variety of topics ranging from the more common methods of protecting assets (insurance) to the less common (irrevocable trusts).

One of the most common methods of protecting assets (and yourself) is insurance.    The fist topic being covered will be automobile accidents and automobile insurance coverages.  Automobile insurance typically follows the vehicle, that means that if you loan your vehicle to someone else, your automobile insurance will probably be the primary coverage for the accident.

Most people with a driver’s license have automobile insurance, because their states require them to have coverage.  Although Comprehensive and Collision coverage are part of the protections offered by most insurance companies, it is minor and the key point is that if you are unable to afford to replace your vehicle if it is destroyed, you should probably have the coverage to replace your vehicle.

One thing to keep in mind while reading this is that as your policy limits increase, the cost of the increase decreases.  I remember when I increased my property damage coverage from $50,000 to $100,000 my premiums went up by around $2.  The reason it is so small is that the likelihood of reaching those new limits was not very high.

The first question is how much coverage should you have?  The general recommendation tends to be a vague answer of “enough to protect your assets if you get sued for everything.”

State minimums vary, but are often only enough to protect minor accidents.  While every accident is unique, I have seen minor injury accidents (broken leg, not serious enough to need a cast but needed physical therapy) exceed $45,000 in bodily injury payments (including pain, suffering, lost wages).  Now imagine a more serious accident and how expensive it can get, such as long term disability if someone loses mental or physical capabilities.

One of the more common limits are often 100/300/50.  This means that if you are at-fault for an accident, you are covered for up to $100,000 per person you hurt (including pain, suffering, and lost wages), but not more than $300,000 per accident for bodily injury coverage.  You would also be covered up to $50,000 in property damage (the damage to the other persons vehicle or other property).

This level of coverage likely covers most accidents, but what if you have a more serious accident?  Can you afford to pay for the excess damages out of your own pocket?

If you are unable or unwilling to pay for the excess damages out of your own pocket, then you should have higher coverages.  Most people are familiar with Automobile Insurance and Home Owners Insurance, but there is another type of policy for excess liability above standard rates for Automobile and Home Owners policies called an Umbrella Policy that typically offer limits of $1 million, $2 million, $3 million, $4 million, and $5 million above and beyond your underlying limits (if you need even more, there are still other options available).

In Part 2, we will discuss how higher insurance limits can also protect you and your loved ones.

Often times, it is ignorance or laziness that causes problems with people accepting documents.  We recently had two clients which had issues with a large bank accepting their documents.

Certificate of Trust

The first client had a revocable living trust and took the certificate of trust into the bank to have their accounts added to the trust.  In California (as an example), this issue is actually addressed by statute, which is often included in the Certificate of Trust.

RELIANCE ON THIS CERTIFICATION

This certification is made under California Probate Code Section 18100.5 and California Commercial Code Section 8402(a)(2)-(5) and is signed by all the currently acting Trustees. Any transaction entered into by a person acting in reliance on this certification is enforceable against the trust assets.

PROBATE CODE SECTION 18100.5(h) PROVIDES THAT ANY PERSON WHO REFUSES TO ACCEPT THIS CERTIFICATION IN LIEU OF THE ORIGINAL TRUST DOCUMENT WILL BE LIABLE FOR DAMAGES, INCLUDING ATTORNEYS’ FEES, INCURRED AS A RESULT OF THAT REFUSAL, IF THE COURT DETERMINES THAT THE PERSON ACTED IN BAD FAITH IN REQUESTING THE TRUST DOCUMENT.

The resolution was simply informing the personal banker of the consequences.

Power of Attorney

The second issue occurred when our client needed to be added as power of attorney to an additional account at a bank.  Our client visited (a different branch) and they did not want to accept the power of attorney.  What made this more frustrating for the client was that the bank had accepted the power of attorney before, but would not accept it this time without speaking to the clients mother.  While this sounds like a simple issue, the clients mother is unable to answer the identifying information for the bank to satisfy the bank that they were really speaking with our clients mother.

Bank employees are not typically familiar with legal documents and many bank policies encourage using their own internal forms to ensure that it provides the power over financial accounts, because they know their employees are not familiar enough with documents to ensure their validity.  Banks also typically have a legal department that can review other drafted legal documents to ensure compliance.

The client has a valid power of attorney for her elderly mother.  The bank had actually already accepted the power of attorney before to add our client to her mothers bank accounts, but that was added in the presence of our clients mother, so the bank now refused to accept the power of attorney.

In the conversation with our client, we reminded her that the purpose of the power of attorney is to allow you to legally assist her mother, because she is incapacitated.  It is a legal document that is properly drafted and she has the legal authority to act on her mothers behalf.

Once the client returned to the bank, and pushed back a little, explaining the important facts (valid power of attorney, they have already accepted it, and the clients mother is unable to properly identify herself), the banker submitted the power of attorney to the legal department and the issue was resolved.

Conclusion

You are likely far more familiar with your documents than the bankers that you take them to (especially if you went to an attorney to have them drafted).  Bankers are primarily trained how to sell and how to open accounts, not how to review legal documents.

When you are certain that the documents are actually correct, educating the banker and (politely) encouraging the banker to look for solutions rather than simply saying “no” can often resolve the problems.  If all else fails, try to escalate the issue to management, and they may be more familiar or see if your attorney can help resolve the issues.