Asset protection comes in all shapes and sizes. Once the concern of the very rich, or those with potentially great liabilities, asset protection is now for everyone. Whether it’s structuring protection for a nest egg in the event of a financial disaster, or preserving what’s left of a small estate for children and grandchildren, asset protection is worthy of consideration.
In today’s litigious society, there is virtually no way to anticipate how your assets are exposed to potential creditors. If you own a business or practice a profession (medical, legal, accounting, engineering, or architecture), it is truly impossible to foresee the financial pitfalls that exist. Even though many businesses are operated as corporations or limited liability companies (which traditionally offer protection from business debts), there is a growing trend toward attaching certain business liabilities to the business owner.
Although most business owners are careful and diligent about how they run their company, we simply cannot ignore the wide variety of risks that the owner is exposed to. For that reason alone, it makes sense to learn more about asset protection planning, and decide if any of these strategies are appropriate for you.
We welcome the opportunity to learn about your concerns and assist in developing a highly personalized strategy to address your long-term asset protection goals and objectives.
The basic premise of asset protection planning is that you are able to choose which jurisdiction controls your property rights. This is often difficult for people to understand, because most people never have the opportunity to choose which set of laws affect any part of their life. For example, we have no choice of who controls the traffic laws that we all must adhere to – that is decided by the municipality that you are driving in, and there is no way to change that.
Similarly, none of us in the U.S. can decide which set of tax rules apply to us – the Internal Revenue Service takes care of that, and there is no way around it. However, wealth usually takes the form of personal property. Securities, for example, whether publicly traded or privately held, are personal property; and personal property is usually governed by the laws of wherever the property is located. That’s why the location, or domicile, of the owner of that property is so important. Some countries allow you to be much more protective of your property than other countries.
An asset protection strategy may incorporate use of one or more business entities, trusts, IRAs and qualified retirement plan funds, titling, and insurance as planning strategies used to shield a “nest egg” of assets from the reach of creditors.
The goal is to develop a wealth preservation plan that is effective and that will leave you with peace of mind if disaster strikes. Asset protection strategies are generally not designed to take control of all of your assets, such as your daily living expenses, mortgage payments, or other loan payments. Rather, they are designed to take a certain portion of your wealth and allocate it to structures that would likely frustrate the efforts of future creditors. The goal here is to reassure the client that they have wealth that may be beyond the reach of creditors that they can rely on to rebuild in the unlikely event that disaster strikes. It is not designed to shield assets that are needed for short-term or mid-term financial needs.
The best time to do this type of planning is when you need it the least. You can’t typically buy insurance on your boat while the boat is sinking. By the same token, you can’t typically protect your assets after you’ve been sued or after you’ve committed an act that is likely to end in a lawsuit. Stated in legal terms, you cannot protect your assets from current or from reasonably anticipated creditors. There are state laws (Fraudulent Transfer Rules) that address “fraudulent conveyances.” A fraudulent conveyance is any conveyance of an asset designed to hinder, delay, or defraud a creditor. You need to plan when there are no threats to your wealth. Otherwise, the planning is very much at risk, and likely ineffective.
If you keep a majority of your assets out of the asset-protected vehicle, and by transferring the protected assets before you have financial difficulties, the transfer is unlikely to be characterized as a fraudulent conveyance. If, on the other hand, you transfer all of your assets to a protected vehicle, thereby leaving yourself insolvent, the courts are more likely to find a fraudulent conveyance occurred.
There are now some U.S. states that passed laws allowing the establishment of an asset protection trust. Alaska was among the first of those states, quickly followed by Delaware and Nevada. There are 17 states that now allow this kind of domestic asset protection planning. This trend is in response to voter demand for this type of legislation, with the hope that people can protect a portion of their assets without moving ownership of these assets offshore. As often happens, there is some competition among the states for the most aggressive legislation, because, with the trusts attracted to those states, there almost certainly follows more tax revenue.