What Is Asset Protection Planning?
Asset protection planning involves figuring out and applying a lawful series of techniques that protect your assets from claims of future creditors. There are techniques that are designed to deter potential creditors from going after you, and frustrate them if they do, generally by making it difficult or impossible for future creditors to grab hold of your assets or collect judgments against you.
In cases where significant sums are involved, asset protection planning often includes setting up a series of trusts, partnerships and/or off-shore entities to hold legal title to your assets. A future creditor who recognizes how difficult it would be to collect on any judgment it may win, might decide it makes little sense to pursue a claim, or be willing to settle for pennies on the dollar.
There is a very sharp dividing line between “legal” asset protection planning on the one hand, and actions to defraud creditors, which are criminal, on the other. For that reason it is essential to have a guide through the process.
We urge all visitors to our site to beware of some operators, sometimes posing as foreign trust companies, that market packages of services that they claim will protect your assets. Some of them are criminal enterprises that will steal your assets. Some are fast buck artists that will leave you with no protection. Some will open you up to
serious criminal charges. Many will do all three – take your money, leave you with no protection, and set you on the road to prison.
Why Might I Need Asset Protection?
If you are “wealthy”, “comfortable” or even if you just have some positive net worth, most likely you are concerned about keeping what you have, and preventing others from taking it. This concern is real, as there are people who will take advantage of any opportunity to take what you have.
If you are a physician you are aware of horror stories about colleagues who lost everything after being held liable for medical malpractice in amounts far beyond their malpractice insurance.
Asset protection planning enables you to employ legal techniques to prevent anyone from taking your assets. However, there are limitations as to what you can and cannot do.
Your degree of exposure to risk of liability, the type of assets you own, and your total net worth are essential factors to consider when you develop a strategy for asset protection. Your occupation can be one indicator of the risk of liability – for example, a pyrotechnics engineer has tremendous occupational exposure. Statistics can help you decide your risk factor, and help you to assess what kind of asset protection you need.
Insurance is the most common asset protection technique. By “transferring” the risk to an insurance company, you can usually protect your assets. But even if you buy insurance, it might not cover all possible risks that you face, or the amount you buy might not be sufficient, or the insurance company may be able to deny the claim (perhaps it could claim there were misstatements made in your application), or the insurance company may become insolvent. Asset protection planning helps you prepare for these “wild-card risks”.
What Are Some Simple Asset Protection Techniques?
Many of the traditional forms of estate planning can be used effectively as asset protection techniques. Gifts of property not intended to defraud creditors remove the assets from your estate. If your child owns the farm, it is no longer at risk from your creditors – although your son’s creditors and his spouse may pose a risk.
Retirement plans have a considerable amount of asset protection built in due to federal and state law. Spendthrift provisions in life insurance contracts and certain trusts can prevent creditor attack while the assets are outside the hands of the beneficiary. Conduction business as a corporation, using limited liability companies, limited partnerships and other business entities afford considerable personal liability
protection, as well as possible tax advantages. And, title holding trusts offer a multitude of advantages to be considered.
When considering an asset protection plan, these traditional forms of asset protection should be the first ones considered. But they may not be enough.
How Do I Know If I Need To Employ Additional Asset Protection
You should first perform an asset risk analysis to assess both the likelihood and extent of your exposure – in light of your occupation and other activities that could create liability – and the nature and extent of your assets, your family situation, as well as your own personal wishes and desires. You would evaluate the various risks and exposures you face, and figure out how far you are willing to go to protect your assets from attack. Sometimes, and for some people, merely buying more insurance or incorporating your business will suffice. For others, more would be required to give you the level of confidence you desire.
Can I Own Property Without Exposing It To Risk Of Loss?
Any seasoned attorney, before filing a lawsuit, often conducts an “asset search” of the proposed defendant. The person filing the lawsuit will want to know whether it is worthwhile to sue, and whether a judgment would be collectible. Information about you and your assets is readily available from public records. An investigative firm can quickly gather all sorts of information about you — the location of your real property, bank and brokerage accounts, ownership of automobiles and boats, business interests, any bankruptcy petitions you may have filed, plus all kinds of other personal information for a surprisingly low fee. Thus an attorney will be able to tell if the lawsuit is worth taking, based upon the ability to collect the potential judgment. Be aware that this information is available to almost anyone who knows how to go about obtaining it.
One key to an asset search is your name. By changing the name of the registered owner of a piece of property, you can change the ownership records, and your property will “disappear” from local records. Simple changes, such as recording the name of the owner of a piece of real property from William Smith to Bill Smith, or putting a piece of property in your spouse’s name is not good enough. However, more
innovative name changes can keep the true identity of the owner confidential.
It is important to note that changing the name of ownership may have other unintended consequences. For example, in California, if a parcel of real property is transferred to a family limited partnership, real property tax reassessment will be triggered. So if Ethel transfers her personal residence to the “Secretive Limited Partnership,” her purpose of concealing the true name of the property owner will be achieved, but the local tax collector may investigate this change of ownership to see if her property tax can be increased. In addition, changing the ownership may trigger Federal gift taxes. So before you change the ownership of your property, consider the unintended consequences.
Transferring property out of your name may also result in a loss of control. Some people will trade a lower degree of control for the benefits obtained. The amount of control that you want to have over your property will help you to determine what asset protection technique should be used. As a general rule, the less control you have over your assets the greater the degree of your asset protection.
Do I Have To Employ Asset Protection For All Types Of Assets?
All assets are not the treated in the same manner. Some assets are exempt from attack, while others need more protection. For example, your bank account can be more easily attacked than the home you share with your spouse. Consider the difference between exempt and non-exempt property as you develop your asset protection plan.
Some examples of exempt property include:
public and private retirement benefits;
household furniture and furnishings;
personal effects, such as clothing and jewelry;
disability and health benefits;
proceeds of life insurance and annuity policies;
social security benefits; and
tools of a trade or business.
State law governs whether a property is exempt or non-exempt. When looking at your state law, be sure to check to see how much of an exemption is allowed for the particular type of property – it may be completely exempt, or exempt only up to a certain amount. For example, jewelry, heirlooms and works of art may be exempt up to $X, while 100% of the assets in you pension plan may be exempt.
Using the applicable exemptions, you can structure your property holdings to turn non-exempt property into exempt property. For example, instead of putting cash into a bank account, you might decide instead to fund a retirement program. Using the allowable exemptions is one of the most cost effective techniques for asset protection. Unfortunately, exemptions alone are insufficient to protect many of your assets; more sophisticated techniques may be required.
How Can I Protect My Personal Residence?
Depending on your state of residence, the “homestead” exemption may protect some or all of your interest in the house and the adjoining land that you occupy as a home. Creditors may not be able to force the sale of homestead property. The amount of the homestead exemption that is available is set by state statute.
If the equity in your residence exceeds the exemption allowed, one way to decrease it is to borrow against the property. You can use the proceeds of the loan to acquire additional exempt property. This strategy enables you to maximize the exemption available for a dwelling or a declared homestead.
Some state homestead examples are:
California – between $75,000 and $125,000 (depending on circumstances).
Florida – up to 160 acres of contiguous land together with the improvements thereon if the homestead is located outside a municipality, or up to one-half acre of land together with the residence located thereon if the homestead is within a municipality.
Texas – up to 200 acres of land, in one or more parcels, together with improvements thereon if the homestead is not located in a town or city, or not more than one acre of land, together with improvements thereon, if the homestead is located in a city, town or village. In Texas it does not matter if your homestead is worth $10,000 or $10 million.
Another strategy to be considered is to transfer the property to an Equity Holding Trust. Click here for more info…
How Can I Use A Retirement Plan To Protect Assets?
If your retirement plan is qualified under the Federal Employee Retirement Income and Security Act (ERISA), your ownership in the plan is exempt. No third party is able to get to retirement funds held in ERISA qualified plans. This makes an ERISA qualified plan an excellent asset protection technique.
Conversely, a private retirement plan that is not ERISA qualified is not automatically exempt from judgment creditors. This does not mean that the funds are non-exempt, it just means that formalities – such as filing a Claim of Exemption in the event of a levy – must be followed in order to protect these assets.
Self-employed retirement plans, IRAs and annuities are exempt only to the only to the extent provided by state law. For example, in California, the only non-ERISA retirement plan assets that are exempt are those necessary to provide for your support when you retire, and for the support of your spouse and dependents, taking into account all resources that are likely to be available for your support when you
From an asset protection standpoint, you should consider maximizing the earnings that are placed into your ERISA retirement plan. In addition to the deferral of income tax, you obtain substantial protection against creditors while the funds remain in the retirement plan. In most instances, funds are protected until they are distributed out of the retirement plan and placed in your hands.
What Techniques Can I Use With My Business Property?
The legal structure of your business is extremely important. State law enables you to create a legal entity – a separate “identity” from your own person – under which you can transact business, without the risk of exposing your assets to any personal liability that might arise out of your business affairs.
Sole proprietorship affords the least amount of asset protection. Anything you or your employees do in a business that is a sole proprietorship exposes your assets.
In terms of asset protection, being a general partner can be even worse. Anything that one partner, or any employee, does in the course of the business affects all of the partners, because each partner of the of a general partnership is personally responsible for all obligations of the partnership.
To avoid risking personal liability for activities arising out of business, you need to consider other available forms of business organization which provide greater protection. Changing the form of business ownership will involve some legal work, documentation, filings with various government agencies, and have some tax impacts.
Some of the more common forms of business ownership which reduce personal liability are discussed in the sections on Corporations.
What Protection Is Available By A Revocable “Living” Trust?
A revocable “living” trust is a vehicle that is very helpful in avoiding probate. During your lifetime, you can transfer ownership of your assets to the revocable trust so that it is owned by the trust at the time of your death, and thus not subject to probate.
A revocable trust is not a very good asset protection technique – assets that you transfer to the trust will remain available to your creditors. However, it does make it more difficult for creditors to access these assets; before doing so, the creditor must petition a court for a charging order to enable the creditor to get to the assets held in the trust.
In addition, in most instances a revocable trust becomes irrevocable, usually upon the death of the grantor. Once it is irrevocable, a typical “anti-alienation clause” protects the assets held in the trust from being used as collateral by the trust beneficiaries. While the assets are held in the trust, the beneficiaries do not have control over the
property, and any distributions are subject to the trustee’s discretion. Creditors cannot force a trustee to make a distribution to the trust beneficiaries; thus the assets held in a trust can remain outside the reach of the beneficiaries’ creditors (until distributed into the hands of the beneficiary).
What Protection Is Available By A “Equity Holding” Trust?
Remember that TV ad of a few years back where a guy eating a chocolate bar comes around a blind corner and smacks into a lady munching a peanut butter sandwich… and voilá, the Reese’s Peanut Butter Cup is born!
Well, something similar has happened within the world of creative real estate. Grossly underrated, and all too frequently misunderstood, the Title-holding Land Trust has collided with the “Net Residential Lease,” with some astounding results. Both devices-the Land Trust and the Net Lease-have been around for centuries; but only a select few professionals know beans about trusts in general; and even fewer have the slightest idea of what a land trust is.
Despite an almost universal ignorance of land trusts, the fact remains that anyone residing in, and making payments on, a property owned by a revocable, beneficiary directed, inter-vivos ["Illinois-type"] title-holding land trust (phew!), need only be made a co-beneficiary in it, in order to reap the myriad benefits of homeownership. For the resident beneficiary, this trust/lease arrangement actually provides pride of ownership, use, occupancy, equity build-up, appreciation and income tax write-off [Belden, 70 TCM 274, Dec. 50,802(M) re. IRC Reg. §1.163-1(b); IRC 163 (h)4(D); Rev. Rul. 92-0105, etc.].
Think About It: At Last, A Legitimate Vehicle For…
Passive Seller-Carry’s with minimal risk of attachment to the property later by the other party’s creditor judgment, tax lien, bankruptcy or marital dispute. In other words… all the benefits of Options, Wraps, Contracts for Deed, or even Equity Sharing without their inherent dangers and discomfort.
For more info see our Equity Holding Trusts section…
What Protection Is Available Through A Family Limited Partnership?
A Family Limited Partnership (“FLP”) is a limited partnership that is formed to manage and control jointly-owned family property. All the requisites of a limited partnership must be followed in order to have a valid FLP. Upon formation, the assets of the family are assigned or transferred into the FLP for ownership, management and control. In most FLP’s, the parents are the general partners with a 1% interest, while the children and siblings share the remainder as limited partners. Thus the parents’ exposure to risk of loss of property held by the FLP is greatly reduced. Even if a charging order is obtained by a creditor, the partnership can limit distributions (for legitimate purposes) to reduce exposure.
An FLP also can have a dramatic effect on gift and estate taxes. By transferring assets to a FLP, general partners can use valuation discounts to lower values. With lower valuations, the amount of tax imposed can be substantially reduced.
Can I Use Bankruptcy To Protect My Assets?
Although bankruptcy is not necessarily a desirable course of action, it has lost much of its traditional stigma, and is now sometimes used as an asset protection device. By filing a bankruptcy petition, you can stop all action being taken by your creditors. However, the timing is crucial when filing a bankruptcy petition, especially if you want to protect
certain assets. Although you may want to quickly stop creditor harassment, be aware that a hastily filed petition may work to your detriment. Knowing how bankruptcy works can be extremely useful in protecting your assets. Prior planning is essential before a petition is filed. Any transfer of assets made within 90 days of filing a bankruptcy petition may be voidable, and thus subject to the claims of creditors. You should make any transfers, and then hold off filing the petition for the requisite 90 days, thus preventing the property from being recaptured in the bankruptcy estate.
It is important to note that transfers made to “insider creditors” are subject to a one year avoidance period. An “insider” is a creditor who knows when a debtor is in financial trouble; thus a transfer to an insider has a discriminatory advantage over other general creditors. To prevent benefiting insiders unfairly over other creditors, the bankruptcy code has extended the avoidance period in this case.
Before you decide to file for bankruptcy, you need to consider the timing of transfers which have been made, transfers which you are contemplating, and current creditor activity. By having a good assessment of your estate, you can determine an appropriate course of action prior to filing the bankruptcy petition.
What About Foreign Trusts And Other Off-Shore Entities?
For people who have larger estates, and thus larger potential creditor exposures (running into millions of dollars), “off-shore” foreign trusts can be used to provide a high degree of asset protection. Common destinations for these trusts, such as the Bahamas, Bermuda, the Turks and Caicos Islands, the Cayman Islands, the Cook Islands, Gibraltar, and the Isle of Man, have laws which tend to insulate and protect grantors. In establishing a foreign trust, you transfer ownership of your assets a trust that has only foreign trustees (with no offices or agents in the United States), which manages and administers the trust property from the off-shore sites. When your creditors begin looking for your assets, even if they discover the off-shore trust they will have to deal with the foreign trustee. The creditors may then find that there is no available remedy obtainable against an uncooperative foreign trustee. This is because the courts here in the United States have no jurisdiction over foreign trustees, and therefore are unable to provide any relief to creditors. Further, the actual geographic distance between the creditor and the trustee poses significant real barriers to creditors.
However, care must be taken prior to establishing and funding a foreign trust. The grantor should execute a statement of solvency with a balance sheet (or other appropriate financial statement) showing a positive net worth. This is essential in order to establish that you are not entering into this transaction in order to defraud creditors. Such a statement of solvency will also help those who assist you, so that they will not be attacked on the basis that they were co-conspirators in a fraudulent scheme.
Further, not all of your property should be placed into the foreign trust. You should retain locally assets sufficient to sustain your lifestyle, and transfer the remaining bulk of the estate to the off-shore foreign trust for protection. Remember it may be nearly as difficult for your family to recover your money from a foreign trust as it would be for your creditors to do so.
It is also possible to put foreign trusts, corporations, and other entities together into a limited partnership. In this case, creditors may be forced to wade through several layers of protection before they can get to your assets. Multiple entity structures serve to dissuade casual creditors as only the most sophisticated and well financed creditors have the knowledge, resources, and time to penetrate multiple entity structures. While the cost to you to establish multiple entities is increased, often the level of protection afforded is exponentially increased.
Why Do I Have To Be Careful About “Fraudulent Transfer Rules?”
There are many federal and state statutory prohibitions regarding efforts you take to deter creditors.
Whenever you employ an asset protection technique, you must be careful not to trigger prohibitions against fraudulent transfers. A fraudulent transfer occurs whenever you transfer your property in an effort to stop a legitimate creditor from taking the asset, in order to satisfy a legitimate debt. Further, if you transfer your property away while you know of the existence of a creditor, or have reason to know that a potential creditor exists, such a transfer may be considered fraudulent. The transfer could be undone, and you could be charged with a crime and face fines, restitution orders, probation or incarceration.
All legitimate asset protection preparation specialists are reluctant to assist people in certain asset protection schemes because of the fraudulent transfer rules. If someone else participates in a fraudulent transfer scheme can be regarded as a co-conspirator in the fraud, and can be subject to the same penalties as his/her client. By creating a statement of solvency prior to the proposed transfer, one can protect the transaction from being labeled as fraudulent.