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Asset protection strategies--part I.

Everybody has a plan, either by design or default, and quite often, the cost for doing nothing is much more.

The spirit of that sentence was first taught to me by Ben Feldman. This week, I shared that quote with a 75-year-old man, John, who met with his son, his attorney and I. He thought all his estate plans were in order. Yes, he had a will, medical and financial durable power of attorney documents, and his property was in joint tenancy, but he had no protection against creditors.

Most attorney clients in Western Wisconsin, where I live, are gifting their homes away to their children to protect them against creditors. In small town USA, often the largest asset clients own is their homes. There are problems with gifting your house away to your children. They include: risk of creditor issues, or divorce among children, and loss of the capital gains step-up in basis when they sell their parents' primary residence after it was gifted to them.

How does one solve these problems and still protect their primary residence from creditors? An attorney taught me a strategy last December that made a lot of sense to me. He said to one of my clients, "Why not gift your home to your children through a quit claim deed and then retain a limited power of appointment to transfer ownership between children? If one child got into creditor problems or marital discord, then you could move ownership to your other child and avoid the potential risk. If your child with the financial or relational problem doesn't hold ownership in the property, then there is no risk of loss. The retained power of appointment allows you to return the appropriate ownership back to that child once his or her hardship has passed."

In John's case, he had experienced two strokes. He gifted his home to his son, Andy, and daughter, Jessie, and retained a limited power of appointment to help control which of his children owned his home. If Andy or Jessie faced marital problems, dad could remove them from the ownership and redirect their ownership to the other sibling. John retained the limited power of appointment so that he could still provide guidance after the quit claim deed was completed.

The beautiful thing about this transaction is that from the IRS's perspective, the limited power of appointment is enough to allow the home to receive a full step-up in basis when John dies. The retained power of appointment is not enough power to cause the home to be included in the assets listed for Medicaid planning purposes.

Give your home away and still protect it from potential problems that may arise from your children. Give your home away and still plan for your children to get a step-up in basis when you die. Those are some planning strategies that could be a benefit to your senior citizen clients. Why not give your cake away and eat it, too?

Next month we'll talk about Irrevocable Supplemental Needs Trusts. Don't put your trust in money; put your money in a trust.

Disclaimer: Brent Welch and Life Insurance Selling are not in the business of providing tax or legal advice. Please consult your CPA or attorney for tax or legal counsel before implementing this strategy.

Brent Welch, CFP, ChFC, CLU, started as a financial planner in 1984 and is founder and managing member of Welshire Capital, LLC, a firm specializing in private wealth management, retirement and estate planning. He is a past president of The International Forum, a past board member for the AALU, a 17-year MDRT member and an 8-year TOT member. You can reach him through his Web site at
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Author:Welch, Brent
Publication:Life Insurance Selling
Date:May 1, 2010
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