While working with clients for almost two decades one of the most pressing concerns shared among all of them was protecting the nest egg they had accumulated. Any news headline or market correction would evoke fear about losing their portfolio. It didn’t take long to realize that utilizing asset protection strategies was a must for my clients emotional well-being.
The following is a guest post from Blake Harris. He is the Managing Attorney at Mile High Estate Planning where his primary focus is making sure his clients are protected on all fronts. When he offered to share some of his asset protection strategies on the blog I was excited to share his expertise. Here’s his thoughts on making sure your protected….
For those who have assets, making sure they are safe is a top priority. There are various threats to your continued ownership of your property, including lawsuits, creditors and even divorce.
In today’s litigious society, many different people can try to take what you have worked hard for from you. The good news is you are not entirely defenseless in this area. There are laws you can use to your advantage in order to protect what you have, and it is entirely legal.
In order to do so, you will need an asset protection attorney who has an understanding of the relevant areas of the law.
What Is Asset Protection?
Asset protection is the term that can describe the variety of different financial structures and arrangements you can take in order to keep your assets safe from creditor, judgements and other occurrences such as divorce. There is not one set definition of an action you would take when it comes to asset protection as it could encompass any one of a number of steps. Defined loosely, these are steps to keep your assets in your hands in practically nearly all circumstances. This can be financial planning or a number of any legal steps that can be taken.
Who Can Help?
Generally, it will be an estate planning attorney that will have the knowledge necessary to assist with this process. There are any one of a number of different disciplines of law that may be involved in asset protection, including trusts and estates, family law, personal injury and corporate law. Most individuals do not have knowledge of one of these topics of law, let alone having sufficient expertise in all of them. This is not really something the average person can do on their own.
Instead, they will likely need the help of attorney to execute these plans. If anything is done wrong, it could nullify the entire asset protection effort. Then, you will not discover you are unprotected until it is too late. Hiring an attorney can minimize many of these risks and give you the peace of mind to know your asset protection plan will be effective.
There are several different outcomes with asset protection plans. One outcome is to move your assets beyond the reach of anyone who may be trying to take them from you. This will mean that, while you may be sued, your assets cannot be reached. Losing a lawsuit and losing your assets are not necessarily the same thing. When someone successfully sues you, they will obtain a judgment against you.
However, they will need to find your assets suitable to satisfy the judgement. If assets are protected or are moved out of your control, anyone who holds the judgments will not be able to attach the assets. They will only be able to go after what they are able to, and the asset protection plan will place much of what you have out of the purview of a judgment.
Alternatively, other forms of asset protection will give you the assets necessary to pay a judgment or creditor in the event they come after your assets.
When Do You Need It Most?
The simple answer to this question is now before it is too late. If your asset protection plan is not in place when trouble hits, you will have difficulty safeguarding your property. There are laws that prevent something called a fraudulent conveyance. This occurs when someone tries to transfer money to another party in order to avoid a debt or a judgment. The key here is there has to be a debt or a judgment that one must be trying to circumvent.
This means any plan must be in place before the debt or incurred or the judgment is entered because anything executed after that may be considered null and void by a court. While you may not go to jail for this, a court will look for an equitable solution in order to keep you from shifting assets around to get out from under an obligation. The appropriate time to worry about this is before there is anything to worry about. If the asset protection plan is already in place, then it will be operative and provide the safety you need.
While most people would benefit from some type of asset protection, not everyone will ultimately need it. By definition, you will need to have assets you are trying to safeguard, so you will need to have a net worth. People who would be ideal beneficiaries of this course of action would be those who may ultimately face frequent lawsuits or the threat of a financially crippling lawsuit.
For example, while doctors may have malpractice insurance, it does not always remove all elements of personal risk to them. Doctors live with the possibility they may have to surrender assets if there is a judgment against them. While they do need to maintain control over some of their assets, it may behoove them to “take money off the table” by executing an asset protection plan. In addition, spouses who enter into a marriage with significant assets of their own may also gain from an asset protection plan because prenuptial agreements may not always be foolproof.
Another important use of an asset protection trust is for someone who may eventually need nursing home care. Nursing homes will look to your assets first, and if you do not have them, then Medicaid would cover the costs of skilled nursing care. Thus, it is imperative to move assets into a trust so that the cost of a nursing home does not eat up all of the assets that you plan on leaving to your loved ones.
What Are Different Types of Asset Protection?
Many of these plans involve trust agreements where you will surrender some beneficial control over an asset in exchange for protecting it from creditors. In other words, you would establish any one of a number of different trusts and move assets into the trust. It is the surrender of control of the asset to someone else which legally separates the asset from you such that there is a distinct identity for the asset.
When you give up the right to exert various forms of control over the asset and give someone else the ultimate power over it, you and the asset are disassociated in the eyes of the law even if you maintain an ownership interest in it.
Other types of asset protection involve the corporate or legal form of the asset or entity. For example, you can set up a Limited Liability Corporation which protects your other assets. While this does not protect you from all types of liability, it means that, if there is a liability-creating event, all the creditor or judgment holder can go after are the LLC assets, including its bank accounts and any property that it has. When this is your business form, your personal assets are largely safe.
Another type of asset protection is to place assets in a tenancy by entirety if you have a spouse. This means that if there is a judgment, the property of the other spouse cannot be reached. Any asset is joint property. However, this means that in the event of a divorce, you may lose some of the property.
Further, while many think of complicated asset structures when they think about protection plans, this can be as simple as buying the right type of insurance. There are specialized policies that can protect assets in the event of a lawsuit. These policies will kick in when the amount of the judgment exceeds existing insurance limits. While insurance can help protect you, it is by no means foolproof and you may not be able to get a policy big enough to remove all risk.
What Are Different Type of Trusts You May Need?
Asset protection trusts can be either domestic or offshore. Which form you ultimately choose depends a lot on the state where you live and whether it permits certain offshore trusts. For example, there is something called a bridge trust that takes effect on the occurrence of a certain specified event. You can remain the trustee in full control of your assets until this event happens. When the event does occur, the trust is automatically set up and the foreign trustee takes control of your assets while you maintain ownership. Then, at some point, the trust can dissolve and you can regain control of your assets. There are various types of offshore LLCs that can act as asset protection entities.
Not every state legally recognizes a bridge trust. In fact, only a handful of them allow this under their laws. However, there are other forms of foreign offshore trusts that can protect your assets which are legal in all states. The countries where these trusts are domiciled have taken steps to make their jurisdictions as defendant-friendly as possible. There may still be attempts by courts to force you to repatriate your assets, but they will be better protected than if they are in the U.S.
Of course, you can always elect to use a domestic trust in order to protect your assets. These are easier to establish and they have certain tax advantages that foreign trusts lack. These will typically cost less to set up than a foreign trust since it will cover less geographic distance and there are fewer parties to work with when establishing the trust. One feature you must be aware of is some of these trusts must be irrevocable in order to provide the desired asset protection. In other words, once you move the assets into the trust, it is permanent and they cannot be moved out. Make sure your attorney checks the laws of the state you are in because they are not always permitted.
What Is the Extent It Covers?
To be clear, asset protection plans are subject to tax laws. Even if the assets are placed in a trust, you would still be responsible for whatever your tax liability is. While these trusts may protect your assets, they cannot be designed to defeat the IRS.
In addition, some judges may compel you to repatriate assets held overseas under court order. Some courts could impose a jail sentence for failure to comply with that court order. This depends on the particular judge and the type of arrangement you have.
How to Pick an Attorney
It is important to know the extent of the lawyer’s expertise before you retain them as your counsel. Look to see the areas of law with which they are familiar and make sure they have the ability to work across disciplines.
At the same time, you do not necessarily want a generalist who practices different areas of the law. It is better to choose someone who has a dedicated expertise in estate planning and asset protection because one mistake can permanently alter your financial picture.
The Bottom Line
Of course, this guide would be incomplete without a discussion of some of the drawbacks of an asset protection plan so you can make an informed decision about what to do with your property. One of the main considerations is trusts cost money to set up and maintain and then require tax returns over the life of the trust. In addition, as mentioned above, trusts can have a certain degree of permanence that is inescapable.
Finally, when placing assets in a trust, you will lose some element of control over the asset, lest a court “pierces the veil” and finds you are essentially the same as your trust.
Of course, you should compare the costs of setting up the trust to what you may stand to lose if creditors or judgement holders have the ability to help themselves to your assets.