Estate planning and asset protection often clash. Good asset protection is frequently poor estate planning. Then, there are times when asset protection and estate planning work together. An example is an irrevocable insurance trust ( ILIT) set up by one spouse when both spouses are facing a substantial judgment.
This week I advised married debtors facing a joint $1 million plus judgment. The husband owned a $ 1 million life insurance policy on his own life. His wife was the beneficiary and his children will contingent beneficiaries. The husband (insured) has serious health issues. If the husband dies the wife will receive $1 million in death benefits which money will be subject to attack by their joint creditor.
I suggested that the husband form an ILIT for the benefit of his wife and children. The ILIT would have a spendthrift provision and provide for discretionary distribution of income and principal to the wife and children. Florida law provides that the wife’s creditors could not reach her interest in or garnish distributions from the ILIT. It does that matter that the wife is named as the trustee with full discretion over distributions if the distributions are for her health, education, maintenance and support
After the husband is gone and the wife is the surviving debtor the wife’s creditors would have difficulty arguing that the wife made a fraudulent transfer of the insurance policy because she did not transfer any of her own non-exempt assets.
ILIT’s are common estate planning tools to guard and direct proceeds of sizable life insurance policies. This couple’s situation shows how estate planning and asset protection sometimes work together.