Why is Asset Protection necessary?
It is an unfortunate fact that today's society in which we live is a litigious one. You are never more than one mistake away from putting everything that you have worked for at risk in a lawsuit. Alternatively, creditors may also come and try to take away your assets for various reasons. Given the volatility of business fortunes, people will occasionally make mistakes that can potentially threaten their long-term financial future. Further, the growing scourge of identity theft can also place you at risk of running afoul of creditors.
When your insurance has policy limits or will not cover claims that are filed against you, it will be your assets that are at risk in a lawsuit. When someone obtains a judgement against you, it will be your assets that they are able to come after to satisfy the judgement. While there are some categories of assets that would be off limits to judgement holders, mostly everything else is fair game. This means that what you have could become what they have with a few strokes of the pen.
If you work in a profession that is prone to lawsuits, this will be even more of a risk for you. For example, if you have a professional practice, your malpractice insurance may only provide you with so much protection. Similarly, if you are starting a business and have to guarantee your loans, you may also be at risk of losing your assets if things do not work out as you hope.
Asset protection means that things do not have to be this way and you do not need to place yourself at the same degree of risk. Through various proactive steps that you would take ahead of time, you can build a proverbial fence around most of your assets to keep them out of the hands of creditors and judgement holders. Once a case goes to court, you have little to no control over the outcome and whether everything that you have worked for will be threatened. Asset protection is a must in order to give you some peace of mind.
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What does it mean to protect your assets?
Protecting your assets means that you preserve them for both your personal use and for the use of your family in later generations. Asset protection means that you have taken any of a number of possible steps to either change the form of ownership of the assets or the location of ownership in order to make it difficult or impossible for creditors or judgement holders to reach your property. These are the various structures that you would establish to either create some separation between you and your assets or to move them into entities that limit your amount of liability. Asset protection is an overall strategy followed by the execution of any one of a number of steps that are recommended by the attorney to give you the most possible protection.
There is no one magic step that you would take that could give you absolute protection over every asset that you have. Instead, asset protection means that you have worked with an asset protection attorney to devise a strategy of various measures that you would take to give as much protection as possible to as many assets as you can. When done effectively, asset protection will greatly limit the amount of assets that judgement holders can get from you. It is important to remember that asset protection steps are done within the confines of the law and are completely legal so long as they are done while the threat of a lawsuit or other negative even is only general.
Protecting your assets will mean that your attorney will scrutinize the laws of various states and jurisdictions in order to find a general strategy of where to hold your assets and who should exercise control over them. Asset protection will make as many of your assets as unreachable as possible. It means that, even if you transfer control over your assets to someone else, you still own them, but nobody else can.
What do you want to protect?
After a lifetime of work, you will hopefully have a number of different assets and properties that you will want to keep safe from creditors using asset protection. In order to devise the strongest possible asset protection strategy, it is helpful to know ahead of time exactly what it is that you want to protect. Then, working with an asset protection attorney, you will want to figure out which of these assets are already protected by law and which assets you will need to take steps to protect.
The good news is that, in most states, one of the most important assets of all, your home, is already protected from creditors due to homestead exemptions. Hopefully, you will have assets in your portfolio besides your home. For example, you may have other business investments, including real estate that do not fall under any other exemption. Alternatively, you may have your own business whose assets you want to provide with the highest degree of protection.
Since your bank accounts are one of the first things that creditors will go after, you will need to find a way to move the money from your bank account into another legal instrument. Liquid assets are among the easiest things for creditors to attach, so you will have to go to great effort to find a way to protect them. While hard assets such as real estate are slightly more difficult, they are still not off limits for creditors and you must find a way to structure the ownership of these hard assets to keep them in your hands no matter what even if you have to cede control over them.
You may also want to protect your retirement accounts or the assets that you have saved for that stage in your life. Some steps have statutory protections for retirement assets, but when it comes to bankruptcy proceedings, there is a limit on the amount of assets that are protected. Working with an asset protection attorney can help you devise strategies to give the highest amount of protection to the most assets possible.
How does Asset Protection work?
The first step that you will take in the asset protection process is to find an attorney who has a specialization in the field. While there may be a temptation to do it yourself in order to save money, this is an area where you need to do everything right. If your asset protection strategy is based on false assumptions or if someone has made an error, you may be unprotected when you previously thought that your assets are safe. You will want to find an attorney who has a specialty across multiple legal disciplines since there is no one single way to ensure asset protection.
When you retain attorney Blake Harris of Mile High Estate Planning, he will sit down with you to understand what assets you want to protect and what your short and long term goals are. He will take the time to listen to you while applying his professional expertise to your situation, answering any questions that you may have. Blake has a wide variety of experience working with people of various net worths.
Once Blake has spoken with you and understands what you are trying to accomplish, he will draw up an asset protection strategy for you. This may involve moving assets to certain places or creating various trusts in order to hold some of your assets. In consultation with Blake, you will have to decide what you are comfortable with in terms of new structures and homes for your assets.
Asset protection may involve executing a range of legal documents that transfer decision making power over some of your assets to trustees. It may include steps to create various corporate entities and transferring your assets to these entities because of the protections that they provide. Then, you may need to shift other financial assets into certain accounts that are protected from creditors. For example, some states may have absolute protections for retirement accounts as well as other safeguards for other types of annuities that provide you with an income. The most important thing to remember is that your asset protection attorney will have to start putting the plan in place immediately because any asset protection steps that are taken after a lawsuit is filed may be considered a fraudulent conveyance and then disallowed.
Asset Protection Strategies
Asset protection can be done successfully using a number of different strategies. There is no one overarching way to protect your assets. Instead, it will likely mean that you have completed many different steps as part of an overall strategy. The first step towards asset protection will generally involve purchasing insurance that can provide you with a relatively wide degree of protection. However, the mistake that many people make is to stop after simply purchasing a policy. Insurance does not always protect you to the extent that you need and when you require it. As a result, you will need other strategies. There are several different moves that could be considered forms of asset protection that will be described below.
You can create a limited liability corporation for a business or to hold property. Then, your liability extends only to the LLC's property and are not responsible for anything else beyond that. Some people create LLCs specifically to own property. Others create a structure of multiple LLCs to further minimize risk.
Another asset protection strategy is to create a trust. This will mean that you grant property to the trust, and it is under the control of the trustee. Trusts can be either onshore or offshore. There is a greater degree of protection for offshore trusts, but they are more expensive to establish. The trust essentially becomes an identity separate from the grantor since it is a new structure with control that is separate and distinct from the person who has beneficial ownership of the assets.
Additionally, you can move some of your assets into accounts that enjoy statutory protections from creditors. For example, retirement accounts are protected from judgement creditors in some states (but not necessarily from bankruptcy court above a certain amount). Further, some annuities and life insurance policies are protected, provided that they are for the benefit of the person who is seeking to shield their property. You can also transfer property to your spouse's name or hold the property jointly with your spouse. In some states, joint tenancy in the property is enough to shield it from creditors.
Can a Trust protect assets from a lawsuit?
A trust is a legal instrument so, naturally, the answer to this question is that it depends. When structured the right way and in the proper time frame a trust should provide you with asset protection from lawsuits and creditors. The important thing is that the trust must be designed in such a way that there is a separation between you and the assets. In most cases, this means that you will have to surrender some form of control over the asset to the trustee, even while you maintain beneficial ownership. If you retain the power to control your assets, the courts will likely find your trust instrument to be a legal fiction since you are the trust. A successful trust depends on creating a degree of separation between you and the trust assets.
The most important aspect of a trust that will provide you with legal protection of your assets is that the trust is irrevocable. This means that it cannot be undone or modified. This represents a permanent surrender of the trust assets such that it would be inequitable for creditors to be able to take it from you, since they would really not be taking it from you. When a trust is revocable, creditors can still reach it because you ultimately have the power to undo the trust and take back the assets. Even if you are the beneficiary of the irrevocable trust, it is the surrender of control of the assets to the trustee that legally separates you from your assets. Exactly how much protection is provided by a trust depends on the law of the jurisdiction where it has been established. Some attorneys advise you to establish a trust in certain overseas jurisdictions since it is nearly impossible for creditors to reach the assets that are held there.
Frequently Asked Questions
The first thing that you need to do when looking for an asset protection attorney is to pay close attention to the attorney’s experience. You will not want a legal generalist because they may not know the ins and outs of asset protection. Instead, you will want someone with a dedicated experience in the area along with knowledge of the various areas that asset protection law touches upon. In addition, you will want to work with someone who has experience working with both high net worth individuals as well as people of average means who are looking to protect their assets.
It is best to look around among several different attorneys before settling on one asset protection attorney. You should find multiple attorneys and interview them to get a sense of how they would work with you. Talk to each attorney to understand how they would help protect your assets. While asset protection strategies are not a protracted matter like litigation, chemistry with the attorney is also important.
You will want to pay close attention to the attorney’s credentials. Signs that the attorney’s credentials are good include leadership positions in the legal community, especially in the asset protection area. This is a sign that the attorney is respected by their peers. You will also want to examine the attorney’s track record. While you will not be able to know exactly which clients the attorney has worked with, you should pay close attention to the type of clients that the attorney has.
Trust protectors play a very important role when it comes to asset protection. When you move your assets into a trust, you surrender some of the ability to make decisions about the assets. If you were able to control your assets, a court would look at the trust as an extension of you.
The trust protector may not necessarily make the decisions that the trustee makes, but they will have critical duties and responsibilities. First, the role of the trust protector is not the same in every trust. In some trusts, the trust protector has more of an administrative role. In other trusts, the trust protector generally oversees what the trustee does which includes the power to remove the trustee if necessary. This power to supervise includes the ability to veto investment decisions and other choices made by the trustee. They can even modify the terms of the trust.
There are several different possibilities for deciding who can be the trust protector. One choice could mean that it is someone not necessarily connected with the grantor, but who has the specialized knowledge that would enable them to take on these responsibilities. Another choice would be installing someone who is close with the grantor and the family and could make decisions with knowledge of what the grantor’s wishes are. One requirement is that the trust protector not have any existing interest in the trust because then there would be negative tax implications. In any event, the person named to this critical position in the trust should be comfortable with taking on these responsibilities and be someone who is able to make sound decisions.
Your real estate assets may be at risk in a lawsuit, requiring you to take steps to ensure that they cannot be taken away from you even if there is a judgment against you. When it comes to real estate, one of the effective ways to make it judgment-proof is to move it into a holding company. The holding company will have ownership of the property and there will be steps taken to make sure that the holding company is separate and distinct from you.
Typically, the holding company will be some form of LLC. You can a structure of multiple interconnected LLCs to provide the maximum amount of protection. LLCs can be structured in a way that can make it very difficult for creditors or judgment holders to be able to find your assets. Creditors cannot take what they cannot find. When each property is its own LLC, it creates the maximum amount of separation between your personal assets and your real estate property.
Another possible solution is the land trust. When you move property into an LLC, there is a chance that it can accelerate the mortgage payment. A land trust is an interim step that you can take before moving the property to an LLC in order for the transfer not to accelerate the mortgage payment. This solution is essentially a trust on top of an LLC. When these are established, the only way that the property can be subject to judgment is if something happens on that property itself that causes you to be liable.
The number of people who would seek to try to take your assets from you are numerous. You never know what can happen during your daily activities that could cause you to be on the hook for a massive legal judgment that could wipe out everything that you have worked so hard to save. You could be at fault for a major car accident on the way to work and be on the hook for a massive judgment that goes beyond your insurance coverage.
You could be subject to significant liability based on what you do for a living. For example, doctors routinely face malpractice lawsuits and some of the judgments can be staggering. There could be various other creditors that could have the right to attach your assets. You could also rack up liabilities from your business and be on the hook when creditors come to collect if you do not have the right business form.
Really, anyone who faces any kind of litigation should be worried about threats to their assets. This can even be in the form of a divorce when one spouse brings assets into the marriage. The truth is that you cannot even anticipate all of the threats and once a threat materializes, it may be too late to do anything to protect your assets. Sometimes, it is the threat that you do not see that is the one that leads you to financial ruin. Therefore, it is best to be prepared for any type of threat no matter what it is.
Protecting your good fortune involves many different steps that you will take to prevent financial catastrophe from befalling you and your family. It will involve thinking ahead of time about the possible threats that you may face and the ways in which your assets may become vulnerable in a lawsuit or to a creditor. It should involve sitting down with an asset protection attorney in other to catalogue the potential issues that could await you and devising a strategy to make sure that they do not strip you of your hard-earned assets.
Once you have figured out where you may be vulnerable, you will likely need a multi-faceted strategy to protect yourself. One of the first things that you would be is to look at what type of insurance you could purchase as a first step. However, insurance alone is not enough to protect your fortune because of coverage limits that still leave you vulnerable. You will likely need to look into where you can move assets that you do not necessarily need to control. By consulting with an asset protection attorney, you can devise various strategies that involve trusts and other corporate forms that limit your liability.
The key is to move assets where potential claimants and creditors cannot reach them. An asset protection attorney will help you work within the law to accomplish this. Make sure that a lawsuit does not wipe you out by limiting the property that someone could reach. Take maximum advantage of any exemptions that are allowed by law as well as any arrangements that let you protect your property by surrendering some sort of control.
Asset Protection Glossary of Important Terms
Here are some important terms to learn when it comes to asset protection:
Fraudulent Conveyance - Essentially, this is why you want to set up your asset protection strategy ahead of time because if you move an asset in an attempt to avoid a judgement of impede a creditor, it is fraudulent and the court will disallow the transfer and your property will be at risk.
Creditor - This is who you need to protect your assets from because they will have a legal right to your assets as a result of a legal proceeding. This could be someone who has filed a lawsuit against you and won a judgment or someone who you owe money to who has gone to court to obtain a monetary judgment.
Offshore Asset Protection Trust - There are certain countries that have structured their laws to make it very difficult for creditors to reach assets that are held there. In this type of trust, you establish the trust in the foreign country and the assets remain there. The assets will be held overseas and controlled from their and will be subject to the laws of the foreign jurisdiction.
Limited Liability Company - This is a corporate form that will generally provide you with the highest amount of assets protection. Every owner of the LLC is not personally liable for the debts of the LLC. The only thing that creditors can reach is the property of the LLC itself. This is a way of making sure that your business liabilities do not threaten your entire net worth.
Click here to learn more about Mile High Estate Planners and how Blake can help you and your family obtain peace of mind by knowing that you have a long-term succession plan and protection for your assets so potential litigants cannot take them away from you.