What is Asset Protection
Asset Protection planning manages risks to your wealth. Lawsuits, accidents, property damage, and other financial risk are facts of everyday life. Asset protection planning looks to transfer the risk of these events through insurance, repositioning asset ownership, and other protections available under the law.
Who Needs Asset Protection?
Basically, everyone who has assets has a need for asset protection planning. Asset protection planning is particularly important for:
- Corporate directors and officers
- Developers and real estate brokers
- Doctors, dentists, accountants, lawyers, and financial planners
- Entrepreneurs and business owners
- Owners of real estate
- Retirees, especially the generation of current day recession retirees. Having just lost 30% of what they worked a lifetime to save, retirees must protect what is left of their retirement assets. They do not have the years left to re-earn what was lost. They know how fragile a nest egg can be and they must protect it now.
The Lawsuit Crisis
We live in a litigious society. Each year, approximately one out of every twelve adults is sued. There are many types of lawsuits, including:
- Direct Injuries (these are usually fairly easy to see coming):
- Business disagreements
- Suit for 10-Year Old Act
- Wrongful termination
- Indirect Injuries (these are usually fairly unanticipated):
- Contract Liability
- Employee actions
- General partner liability (a general partner's liability for any act of his partners is rarely understood)
- Joint venture liability
- Officer/Director liability
- Partners action
- Personal guarantees
- Product Liability
- Spouse and children
- Spouse signs business checks and is deemed a financial officer
- Vicarious liability
Effects of a Lost Lawsuit
A lost lawsuit on your family or an adverse judgment that exceeds insurance coverage is devastating. Once the judgment is recorded, there are legal proceedings to collect the judgment. The judgment holder forecloses on assets: home, cars, life insurance cash values, business, stocks, etc. Everything the judgment debtor owns, his life's work, his retirement fund, is a target. For the creditor, the procedure is simple. The creditor finds out what the judgment debtor owns (easier than you may think with computerized data banks) and liquidates any or all of the assets until the judgment is satisfied.
Asset Protection and Estate Planning
The Basic Plan
A client's planning strategy should include:
- Asset Protection. Protects clients' assets from the unjustified and unwarranted claims of creditors during client's lifetime and after their death.
- Passage to Heirs. Ensure that wealth and assets accumulated during clients' lives pass to their heirs in the shares and at the times they desire. Make sure clients' heirs receive their inheritance in an asset protected structure.
- Minimize or Redirect Income Tax. Reduce or avoid as much income taxes as permitted by law. For example, a defective trust can redirect the income tax.
- Reduce or Eliminate Estate Tax. Some say that estate tax is an optional tax which is only paid by those who do not plan.
- Reduce or Eliminate Gift Tax.
- Eliminate Probate Fees. (and the time it takes to reach Probate completion)
However, the plan must be within the client's understanding and within their personal risk, and tolerance criteria. The plan must be comfortable. It must be user friendly. It must allow the client to keep control:
- Plan must be user friendly. The client (or his advisors) must understand and be able to maintain the plan. The plan must be matched to the client and the client's advisors capabilities.
- The client must keep control. The client retains effective control over the assets.
Asset Protection Strategies
There are a variety of techniques that are a part of the asset protection toolbox. They include:
- Holding Title among Spouses. There is an unlimited gift tax exemption for transfers between spouses. If you are the high lawsuit risk partner and divorce is not a concern, allowing your spouse to hold title as his or her sole and separate property may be appropriate.
- Tenancy by the Entities (allowed by a few states). This is a method of titling a residence between married people. The creditors of one spouse cannot levy on the residence. However, a creditor of both spouses most likely could levy.
- Exempt Assets. Put assets into a form exempt from creditors. Example: An ERISA qualified retirement plan. Ask O.J. Simpson.
- LLCs and FLPs. Put your assets into an FLP or LLC created under the laws of a state where creditors can only get a charging order (a right to get distributions from the entity) and not an order to sell the entity's interest (foreclosure). If LLCs are set up and operated properly, creditors of the business cannot collect from the LLCs owners.
- Domestic Asset Protection Trusts (DAPTs). DAPTs are now available in several states. They protect the assets of the settler of a self-settled trust.
- International Asset Protection Trusts (IAPTs). Some countries don't grant "full faith and credit" to foreign (e.g., an American) court's judgment. A creditor with a U.S. judgment cannot enforce it in those countries. The creditor must institute a new lawsuit ( a trail de nove) there. This discourages creditors. If a creditor does sue, the trust can "flee" (be sent) to another jurisdiction before the creditor gets a judgment.
- Lease Assets Used by your Business. Creditors of a business can get its assets. They cannot get assets it leases. Real estate used by your business should not be in the same entity which owns the business. Lease real estate and valuable equipment to the operating business entity. If the asset can generate claims (a "hot" asset), then the asset should be owned by its own LLC.
- Separating Risks. If a business is conducted in separate locations each can be owned by a separate LLC. If one is sued, assets of the other will not be liable.