Asset protection is integrated with most estate plans and comes in many different forms. Many assets necessary for day-to-day living are subject to bankruptcy protection laws (e.g., homestead exemption laws). There are also asset protection strategies that involve planning, such as domestic asset protection trusts and irrevocable trusts. Organizational structures such as limited liability companies and corporations can also provide protection for assets with a business purpose. For example, conveying rental property to an LLC will protect your other assets from liability arising out of the rental property (provided the LLC is treated as a separate entity). Conversely, property in the LLC would be protected from liability arising out of your non-rental activities.
Of course, there are laws to protect creditors from debt that has already been incurred, so advance planning is an important element of a well-designed asset protection strategy. In addition to creditor protection, asset protection strategies may also be used to ensure a beneficiary does not waste or lose his or her inheritance (e.g.,substance abuse or perhaps a failing marriage). Rather than an outright gift, a trust could be used to ensure distributions are made in a manner that best supports the beneficiary in his or her situation.
Another consideration is to minimize estate taxes owed by your estate and any income taxes triggered upon transfer of some assets to beneficiaries. For example, the distribution of funds from retirement plans such as 401ks will trigger income taxes in the hands of the beneficiary. Thus, it is often advantageous to direct those retirement plans to beneficiaries with lower income tax rates. If your legacy planning includes charities, they are excellent candidates to receive such funds because they do not pay an income tax.