Asset Protection Planning is the process of protecting assets from potential risks such as lawsuits, bankruptcy, and other liabilities. It’s a proactive approach to your financial situation and your future needs. Assets that need protection may include:

  • Property assets; real estate or land
  • Retirement assets; including IRA, 401k
  • Business interests; LLC or corporation
  • Insurance
  • Cash
  • Jewelry
  • Automobiles

Simply put, asset protection planning is the creation of a plan to protect your assets from seizure by creditors.

Stocks, businesses, and investments that you have put in a lot of work to build up are also considered assets. A smart asset protection strategy will help you keep what you’ve worked hard for and make it available to your heirs down the road.

Why Is Asset Protection Important?

Many people neglect the need to protect their assets when planning for the future. Assets such as property and investments can be seized in the case of bankruptcy if they aren’t carefully protected.

So, it’s important to consider how your future needs might be impacted by the type of assets you own and how those assets will need to be protected.

Asset Protection Planning is not only a highly recommended practice but also a legal one. There are certain laws put in place to protect people from losing the things that are most important to them.

Which Types of Assets are Typically Exempt from Seizure From Creditors?

First, it’s important to understand the difference between exempt and nonexempt property. “Exempt” property is an asset that cannot legally be identified as subject to seizure by a creditor. These assets are protected under federal law (and often state law).

They typically include common kinds of things people buy every day — such as housewares, furniture, or clothing — because they are assumed necessary for daily living. For example, your bedding would fall into this category.

Some other examples include certain benefits such as health benefits, social security benefits, and disability benefits.

Additionally, other assets that are typically exempt from attack by future creditors are those that are necessary for the debtor to continue their business or personal affairs. This might include items like a home, car, necessary tools of the trade, and professional instruments.

Certain assets, such as retirement savings or child support payments may also be protected in certain cases. It’s important to check with an attorney to see what specific protections may be available in your specific case.

Creditors can seize non-exempt property. Nonexempt assets typically include things like artwork or antiques because they are luxury items that aren’t necessary for day-to-day survival.

With respect to bank accounts, the distinction between exempt and nonexempt is really a judgment call. The law specifically refers to bank accounts as property that can be seized by creditors in order to satisfy a debt.

However, money or assets that are held in a trust for the benefit of a spouse or children are generally exempt from seizure.

What is an Asset Protection Trust?

Trusts, in general, can be set up to hold assets that would otherwise be seized during bankruptcy proceedings. They require paperwork and legal documents.

One type of helpful trust is an asset protection trust (APT). This type of trust is also known as a spendthrift trust, or special needs trust.

An APT is essentially a holding tool for assets that are meant to be passed down to beneficiaries in the future. It may not sound like something you need right now, but it can come in very handy if you were to become disabled or find yourself facing serious financial trouble.

An asset protection trust can be used for many different purposes. For example, an APT allows you to move some of your assets out of your taxable estate and into an irrevocable trust where they can be shielded from estate taxes. It will also protect the assets held in the trust from creditors that might try to reach them through bankruptcy filings or lawsuits.

What are Some Other Ways to Protect Assets from Creditors?

Other ways to protect assets from creditors include:

Gifts of Property– One way to protect assets from creditors is to give them away as gifts. This can be done by transferring property to friends or family members, or by setting up a trust that gives the property away to someone else. When done correctly, this can make it difficult for creditors to take the property back.

Separate Bank Accounts– Another way to protect assets from creditors is to set up a separate bank account and put money in it. This account must be kept apart from the other accounts that are used for day-to-day expenses which are commonly exempt from asset seizure.

Life Insurance– A third way to protect your individual assets from creditors is through life insurance. Because life insurance payouts are made directly to loved ones rather than credited toward a debt, life insurance proceeds are not “attachable” by creditors. This means that life insurance proceeds cannot be seized to satisfy a creditor’s judgment.

Forming a Corporation– A fourth way to protect your personal assets from creditors is to do business as a corporation. A corporation is a separate legal entity from its owners, so the creditors of the corporation cannot go after the personal assets of the owners.

Additionally, a corporation can shield its owners from personal liability for the debts of the corporation. This means that if the corporation goes bankrupt, the owners will not be responsible for any of the corporation’s debts.

Is it Possible to Negotiate with a Creditor?

If you have a lot of cash on hand, you may be able to negotiate with your creditors. Explain your situation and see if they are willing to work with you. You may be able to get them to agree to lower payments or interest rates.

If there’s collateral involved in the debt, a creditor may feel more inclined to negotiate if they know it will be covered by something of value should you default on the loan.

This could help convince them not to go forward with filing a lawsuit against you because it would be useless without their collateral to cover costs. It also helps clear up confusion over who owns the property in question.

Creditors can become more motivated to negotiate once they realize you may be having financial issues. If the creditors think that they will not receive any money, then they may be willing to negotiate with you or let you sign up for a repayment plan.

If your past-due debt is near the statute of limitations, a creditor may be more willing to accept a lower amount to settle the debt because if the statute of limitation passes, it will bar a creditor from getting a judgment against in court.

Do I Need an Attorney to Create a Plan to Protect My Assets?

It’s a good idea to talk to an attorney about creating a plan to protect your assets. To set up an Asset Protection Trust, it’s probably best to work with a qualified estate planning attorney who is familiar with the ins and outs of setting one up.

An attorney can help make sure that a trust meets your needs now as well as any potential future changes so that it protects your beneficiaries against creditors and possible asset seizure. In some cases, setting up a trust may reduce your tax liability as well as protect your assets.