Asset protection planning is applying lawful techniques to protect an individual’s assets from claims from future creditors. These techniques are used to deter potential creditors from going after an individual’s property by making it difficult or impossible for them to get the assets or collect on a judgment against an individual.
Asset protection may also protect property from government seizures and private lawsuits. It is a broad field and may involve many different areas of law, including:
- Real estate law;
- Tax law; or
- Insurance law.
Asset protection requires a great deal of planning as well as a working knowledge of any and all areas of law involved in property ownership.
How Does Asset Protection Planning Work?
When significant sums or assets are involved, asset protection planning usually includes setting up a series of:
These instruments will be used to hold the title to the individual’s assets. A future creditor who determines it will be difficult to collect on a judgment it may win might determine it is not beneficial to pursue the claim. The creditor may also be willing to settle for pennies on the dollar to avoid legal costs.
There are some assets that are generally exempt from attacks by future creditors, including:
- Public or private retirement benefits;
- Household furniture or furnishings;
- Personal items, including clothing, jewelry, etc.;
- Disability or health benefits;
- Life insurance or annuity policies;
- Social security benefits; and
- The tools of a trade or a business, because seizing this property would render the debtor unable to work and, because of that, unable to pay back their debt.
When large amounts of money are involved, asset protection may involve creating a series of trusts or partnerships to hold title to the assets. Asset protection is usually only an issue when the owner is in debt, as a creditor may seek to claim their property in order to satisfy a debt or missed payments.
What is a Judgment?
A judgment, in the cases of creditors, a civil judgment, is a ruling against an individual in a court of law. It is awarded in a non-criminal case. It usually requires the defendant to pay damages. These damages are generally monetary amounts.
What Are Some Simple Asset Protection Planning Techniques?
The simplest form of asset protection is to avoid going into debt. This is a difficult task in this day and time, but it remains the only sure-fire way to avoid creditors.
Many of the techniques and instruments used in estate planning can also be used for asset protection. These techniques may include:
- Gifts that include property;
- A Retirement plan; or
- Conducting businesses as corporations, using limited liability companies, limited partnerships, or other business entities.
Insurance is a very common asset protection technique. By transferring the risk related to the assets to an insurance company, an individual can, in most cases, protect their assets.
A gift that includes property, or a gift of property, removes the asset from the individual’s estate and lessens the risk of creditors attempting to confiscate it. For example, if an individual transfers title to their vehicle to their child, it is no longer at risk for attack from their creditors. It may, however, be at risk of attack from the child’s creditors and/of the creditors of their spouse if they are married.
A retirement plan may include placing assets into a trust, such as a charitable remainder trust. A charitable remainder trust is an instrument by which property is placed into a trust for a charitable organization. The individual who creates the trust is called a grantor or settlor. The grantor receives income payments throughout their lifetime. Upon their death, the charity will receive the property remaining in the trust.
Conducting business operations as corporations, using limited liability companies, limited partnerships, or other types of business entities may provide personal liability protections to the individual. It may also provide tax advantages.
For example, a limited liability company (LLC), combines the limited liability benefits of a corporation and the management and tax structures of a partnership. It is referred to as limited liability because, in general, members of an LLC cannot be held personally liable for the actions or debts of the business.
What is Estate Planning?
Estate administration includes the maintenance and distribution of assets after an individual’s death. This process is completed either in accordance with the individual’s will, or, if there was not a will in place, in accordance with local state laws.
Estate planning provides the information and documentation by which estate administration can be completed. It is important for individuals to have estate plans, even if all they include is a will. A will can be used no matter how much or how little property an individual owns. A will can ensure an individual’s property makes a smooth transition to their loved ones in accordance with their wishes.
An estate law attorney can assist with aspects of estate and trust laws, including:
- Estate Planning;
- Estate Administration; or
- Drafting a Will or a Trust.
Estate planning includes organizing an individual’s estate in preparation for their expected or unexpected passing. In general, individuals do not consider estate planning until they marry or have children. It may be important to consider it at an earlier stage should an individual have a large amount of assets.
Estate planning may include planning many aspects of an individual’s life, even some they have not considered. These may include:
- How they should received medical treatment;
- If they wish to donate organs;
- Who will make their legal or financial decisions should they become incapacitated;
- Who will care for their minor children;
- Who will oversee their business interests; or
- Their funeral arrangements.
When an individual’s estate is handled upon their death, the assistance of an executor or administrator is required. The executor is usually named in the will and chosen by the testator, or deceased. They generally assume responsibility over the decedent’s finances. The duties of the executor may include:
- Interacting with creditors;
- Defense of the estate against lawsuits;
- Management of the estate’s assets;
- Identifying the beneficiaries named in the will; and
- Ensuring that those named beneficiaries receive their proper inheritance.
The executor must also pay any debts and taxes to creditors and the government from the assets of the estate. This step must usually be completed before any assets may be distributed. A well-written estate plan can greatly lighten the burden on the executor.
How Do I Know if I Need To Employ Additional Asset Protection Techniques?
The best way to determine if an individual needs to employ additional asset protection techniques is to consult with an attorney. An attorney can perform an asset risk analysis and determine the likelihood and extent of possible exposure to creditors. An individual and their attorney, possibly with help from other professionals, such as accountants, can determine what risks are present and how to best protect those assets.
There are important factors to consider when developing a strategy for asset protection, including:
- The individual’s occupation;
- The nature and extent of their assets;
- Their family situation; and
- Their personal wishes and desires for their assets.
Do I Need an Attorney to Assist with Asset Protection Planning?
Yes, it is essential to have an attorney, also called a lawyer, assisting with asset protection planning. It is important to note that there is a difference between legal asset protection planning and action taken to defraud a creditor, which is a criminal action.
Because of this, it is imperative you have an estate lawyer assisting you with the process. An experienced lawyer can review your assets, create or review an estate plan, and determine what steps are best for you and your loved ones.