Asset protection planning legacy trusts: Ohio's new model law.

• Author: Johnson, Nils P.

"Asset protection planning" is about organizing one's affairs so that the risks of future claims by third parties can be reasonably dealt with--it is not about avoiding paying existing bills or present claims. It is about minimizing exposure to future risks by dispersing asset ownership within the family, by using appropriate liability-limiting business structures, by thinking about the consequences of a potential health or business reversal resulting in lost income, and by maintaining appropriate insurance coverage.

These days, with notable new statutes in several states, including Ohio, asset protection planning can also mean "bulletproofing" assets by moving them into irrevocable trusts. This item briefly addresses basic asset protection issues and then describes Ohio's new asset-protection ("Legacy") trust statute, which moves the state to the head of the class of asset protection jurisdictions.

Asset Protection Strategies

The first line of defense in protecting assets is insurance: It is better to have more rather than less. Professionals need malpractice protection, while businesses should carry not only casualty and liability insurance, but also business interruption coverage. Cyber insurance should be considered to deal with identity theft, damage to records, theft of customer lists and trade secrets, disclosure of sensitive information/breach of privacy, and recovery from malware and malicious codes. In assessing risks, be concerned with catastrophic claims. To keep the cost down, clients can use high deductibles. Young clients with children should prefer cheap term life insurance in large amounts over expensive whole life policies with smaller payouts. Homeowner's policies should provide for replacement-cost coverage, as opposed to fair market value. With the homeowner's police as well, clients should consider carrying a $1 million or $2 million "personal umbrella" of liability insurance; the cost is not great. Finally, young families are wise to purchase disability insurance for the principal breadwinner. To save costs, the family can self-insure for the first 60-90 days until coverage would begin to pay.

The second line of defense is maximally using qualified retirement plans: One must first understand the difference between creditor claims in bankruptcy and nonbankruptcy contexts. ERISA-qualified retirement plans, such as profit sharing plans, 401(k) plans, or 403(b) plans, are protected from creditors in both cases. In Ohio, traditional IRAs (which are not ERISA-qualified) are similarly protected, as...