Pennsylvania Asset Protection - What Really Works?

Many Pennsylvania residents have heard about states, such as Delaware, Alaska, and Nevada where state laws
permit residents and in some cases others, to set up trusts that protect their assets from lawsuits.  Many other clients have told us about asset protection plans and articles that they have read but which are not really effective under Pennsylvania law.  In this post and a few future posts, we will examine a few of the most common misconceptions and we will alert you to a few of the most important strategies and tools that do work.Common

Misconceptions:

Joint Assets Are Protected from Our Creditors and from Lawsuits:

Patially true and partially false.  It is true, that when husbands and wife hold assets jointly, that those assets cannot be reached by the indiviual creditors of one spouse.  However, if you are found to both be liable, your jointly held assets might be reached in litigation.  For example, if you jointly own a house or car and someone is injured by the car or at the nouse, they might get a jusdgment against both owners.  Now they can reach jointly owned property.

Also, if there is a lawsuite against one spouse that goes to judgment against that spouse, and the husband or wife predeceases that spouse, the assets all become the property of the survivng spouse.  Then, that spouses judgment creditors can reach the asset.

Finally, jointly held assets are not protected from medicaid and nursinghomes, and if you own assets joinmtly with a child, that child's creditors might be able to reach that child's interest in the account.

Assets in A Living Trust Cannot Be Reached By Creditors

Largely false.  In most states, including Pennsylvania, a self created trust - one that you create and controll - the person who creats and controls the trust is treated as the owner of those assets and they can be reached by creditors.  There are, however, Irrevocable Trust strategies that can be effectivly used to protect assets for your spouse, children and grandchildren.

For more information on the misconceptions about asset protection and the strategies that really work for Pennsylvania residents, be sure to subscribe to this blog or check back regularly.  You can also read this brief artcile that we have posted about asset protection.  Just click here.

David M. Frees III Esquire
610-933-8069
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You can Avoid Probate and Lose Your Own Assets Now - What's a Parent to Do?

How good is an estate planiing technique that saves 2.25% in taxes but might cuase you to be taxed on your own asset or to lose it?

That is just what can happen when you use the "joint ownership" of accounts and real estate.

There is a temptation to use joint bank accounts and the joint ownership of real estate and stock accounts to avoid probate and to lower Pennsylvania Inheritance Taxes.  However, there are substantial downside risks that should be considered before placing any type of account or real property into a jointly owneed structure.

First, let's consider the pros:

When you place an account in joint names with another person, it becomes a non-probate asset and transfers automatically on death to the joint account holder.  In short, it is simple but may not be best.

There may be a tax savings for Pennsylvania Inheritance Taxes.  If you have two joint account holders, then only half of the asset is taxed by Pennsylvania.  This rule doesn't apply to the Federal Estate Tax which taxes the entire asset.  But beware - you may pay tax on your own money if the joint account holder dies before you.

The Cons:

You mkight be taxed on your own asset during your lifetime.  That's right. If a joint account holder - let's say a son or daughter dies before you, you pay tax Inheritance Tax on your own asset.

Your heirs might be treated unequally.  If you have multiple children and make one the joint account holder of each account and then you become incapacitated, one account might be spent and the other not at all.  One child might get your entire estate.  Think that doesn't happen?  Think again.  It happens frequently.

A joint account holder might withdraw the money.  This doesn't happen often, but many account tiles allow it and it has been known to occur. 

A joint account holder might get sued or divorced and claims might be made on your asset.  Remember, it isn't just your asset.  When a child is added to an asset, there creditors might claim an interest in that asset.  This can be particularly important if you have placed your house in joint names.  This also poses very complicated and often negative income tax consequences discussed in another blog entry.

This type of ownership is mistakenly believed to protect assets from nursinghome and mediciad spend down.  However, joint accounts are a fully available asset.

In short, joint ownership may have a place in estste and trust planning and for asset protection purposes.  However, be sure that such ownership is disclosed to the team working on your estate and asset protection and be sure to discuss the pros and cons in your case.