What is the Function of Asset Protection in Estate Planning?

Asset protection is a broad concept that includes strategies and techniques to help individuals, families, companies, and other entities limit the risk of loss due to lawsuits and related litigation. Most commonly, this concept is applied in estate planning, where financial institutions are created to hold assets for the benefit of their owners during their lifetimes. Legal documents, including wills, trusts, and powers of attorney, may be required when creating an estate plan.

 Here are the functions of asset protection in estate planning;

Risk mitigation 

 Asset protection may take the form of risk mitigation strategies, such as insurance policies and trust structures that mitigate risks associated with assets. For example, a person may purchase an insurance policy to protect his home from fire or theft. The person may also make an irrevocable trust, known as a living trust to give control of his property to another person who will manage it for him while he is alive and after his death. 

Asset segregation

Asset segregation is another way an estate plan can be structured to minimize tax liabilities and maximize distributions under certain circumstances. Asset segregation involves separating different types of assets into separate accounts so they cannot easily be traced back to one person’s ownership or use. For example, if you own an IRA with stocks in it that were purchased several years ago, having them sit in one account may make it easier for the IRS to determine how much you earned from those investments over time, which could increase your taxable income.

Limited liability entities

Limited Liability Entities (LLCs) are a popular vehicle for asset protection in estate planning. An LLC is a legal entity formed in many states that allows an individual to own and operate a business under the same set of rules as a corporation. This is often accomplished through forming a Limited Liability Company (LLC), a business structure that provides its owners with limited liability for business debts and other liabilities. The main benefit of setting up an LLC is that it protects assets from creditors by splitting them into two separate entities. One entity owns the LLC and holds all the assets, while the other holds only those assets necessary to run the business.

Homestead exemptions 

This type of asset protection allows you to take advantage of the state’s homestead exemption laws. These laws protect property from creditors, including their claims on life insurance proceeds or other benefits from retirement accounts. The amount of your homestead exemption is based on a percentage of your home’s fair market value (FMV) as determined by an appraisal. That percentage varies from state to state. It may be as high as $150,000 or more in some states, such as California and New York.


Asset protection planning is intended to reduce the chance that your assets will be subject to creditor claims and lawsuits, mainly when used by those who accumulate substantial wealth or are in professions with a high litigation probability.

Posted in Law