What is asset protection?
Asset Protection is planning intended to protect one's assets from creditor claims. Individuals and business entities use asset protection techniques to limit their creditors' access to certain valuable assets, while operating within the bounds of debtor-creditor law.
Clients may often overlook the importance of asset protection planning as part of their estate planning, assuming it is unimportant if they are not in fear of being sued. However, asset protection planning is necessary for people in all walks of life.
According to Jay D. Adkisson, author of Asset Protection: Concepts and Strategies for Protecting Your Wealth (with Christopher M. Riser), there are ten simple rules to follow when creating an asset protection plan. We’ve summarized them for you below.
Be prepared: Make a Plan Before a Claim Arises
It is much more difficult to provide effective asset protection after a claim or liability arises, because anything you do at that point can be undone by a creditor alleging a “fraudulent transfer.” Avoid this sticky situation by making your plan early and revising it as often as necessary.
Prepare early: Late Planning Can Backfire
Making a plan after a claim arises will only make matters worse. Though it is commonly thought that the only thing a judge can do is unwind a fraudulent transfer, leaving the debtor no worse off than if they had done nothing, this is untrue. Rather, the debtor and the individual who assisted in the fraudulent transfer can be liable for the creditor’s attorney fees.
Insurance Cannot Be Replaced by Asset Protection Planning
Asset protection planning serves as a supplement to, not a replacement of, insurance. Likewise, insurance acts as a supplement to asset protection planning. If you were to ever be sued, then the insurance company would pay to defend the action and attempt to settle it.
Put Personal Assets into Trusts and Business Assets into Business Entities
Personal assets belong in trusts, not in business entities. There are plenty of laws that protect trust assets in a way that they could not be protected if they were placed in a business entity.
Too Much Control Is NOT Beneficial
As a client, it is important that you have sufficient control over your assets, but not so much control that the creditor can make the argument that the debtor and the asset protection structure are one and the same.
Asset Protection Planning and Tax and Estate Planning Don’t Always Jibe
At times, what might work for an estate plan might not work for an asset protection plan and vice versa. It is important to know what each type of plan entails and how to use each plan to your benefit.
Offshore Accounts Are Not What They Appear to Be
Recently, cases have demonstrated the power of the courts to require debtors to return their money to the U.S. through “repatriation orders.” In such cases, if debtors do not comply with a “repatriation order”, then they could be held in contempt of court and put in jail—sometimes for years.
Bankruptcy Is Not a Last Resort
Changes to the bankruptcy laws in 2005 made parts of asset protection plans invalid in bankruptcy. If you engage in asset protection planning, and you take bankruptcy within 10 years, then know that the bankruptcy trustee can reset the table as regards your asset protection plan.
Keep It Simple
You, as the client, should be able to explain how assets are held and how the assets were transferred. There is a greater chance of the judge finding a fraudulent transfer if the structure and transfers are too complicated and poorly explained.
Avoid Secrecy: Everything Sees the Light of Day
When creating your asset protection plan, presume that the entirety of the planning and its purpose will eventually become known to creditors. Secrecy will only lead to more problems in your asset protection plan. If you file bankruptcy and fail to make a full disclosure of your assets, then you can be denied a discharge. Also, failure to make a truthful disclosure can result in charges of perjury and bankruptcy fraud.
To summarize Jay’s sound advice, in today’s increasingly litigious world, the shielding of assets has become a prominent issue for financial planners, business owners, and high-net-worth individuals. Asset protection strategies are both legally and morally legitimate for protecting one’s assets from creditors, lawsuits, and scams. Hatley Law Group specializes in asset protection.