Asset Protection Strategies
Protecting your assets from creditors is an essential part of business and estate planning. When we think about asset protection, we often think of shielding assets from bill collectors, etc. But, asset protection also means protecting assets from judgment and lawsuits. In fact, protection from potential lawsuits is the most common concern that most asset protection clients have.
Good asset protection is not simply about hiding assets. Rather, it is about using existing laws to put barriers in front of creditors to discourage them from attacking your personal assets. Good asset protection will not always prevent a lawsuit, but it can significantly discourage a lawsuit from being filed or help you settle it for pennies on the dollar.
Who Needs Asset Protection?
Anyone with money needs asset protection, especially high net worth individuals. Furthermore, anyone who can't hide behind the asset protection of a corporate business structure needs asset protection. This includes professional, such as:
- CPAs and accountants
- Financial planners
- Insurance agents
Even if a professional is working as an employee of a company, he or she can't hide behind the limited liability of the company and can be sued personally.
What Assets Need to be Protected?
The short answer to this question is anything of value that you own in your own name and don't want to lose in a lawsuit. This includes, but is not limited to your:
- Family home or rental property
- Non-rental property
- IRAs and Retirement plans
- Stocks and Mutual Funds
- S-Corp or C-Corp shares
- Bank Accounts or CDs
- Planes. Boats, Automobiles, Motorcycles, Snowmobile, etc.
- Collectible items that have significant value
- Accounts Receivables
- Future inheritances for family members
Asset Protection Strategies
The most common asset protection strategies are as follows:
No asset protection strategy is a substitute for good liability insurance. This is because no asset protection strategy is guaranteed to deter a lawsuit nor will it pay your legal fees if you need to defend a lawsuit.
Maintaining liability insurance provides asset protection against certain types of lawsuits. In addition, having insurance in place means that your insurer is responsible for your defense and must appropriately fight or settle the claim on your behalf.
Using a Protected Entity
Transfer your exposed assets to a protected entity, such as a corporation or limited liability company (LLC), to protect them from business creditors. Using a protected entity is especially useful if you own a business and want to keep your business finances and your personal finances separate.
If you own your business as a sole proprietorship or partnership, you may be exposed to unlimited personal liability for the business's debts and liabilities. Furthermore, you can even be financially responsible for any bad business decisions, fraud, or criminal acts committed by your partners.
Because of this, operating as a sole proprietorship or general partnership can be extremely risky and expose you to a great deal of personal liability. For personal asset protection, you should consider forming a corporation, limited liability company (LLC), or limited liability partnership (LLP) to protect your personal assets from liabilities and judgment arising out of your business involvement.
Before proceeding with this strategy, you should familiarize yourself with state laws and enlist the assistance of a qualified business law attorney.
Converting Exposed Assets Into Exempt Assets
Exempt assets are simply assets that, by state law, are exempt from exposure to lawsuits, judgments, and creditor actions. Exemptions vary by state law, but some of the common things that are exempt from state to state, include your primary family residence, life insurance, retirement accounts like 401(k), 403(b), Individual Retirement Accounts (IRA), and some annuities.
Using Trusts to Protect Your Assets
A trust is a legal business entity that owns and manages your assets for you and your beneficiaries. There are many different types of trusts that you can create for asset protection, such as an asset protection trust, qualified personal residence trust, life insurance trust, and more.
In general, for effective asset protection, the trust has to be irrevocable, meaning that it cannot be revoked after it has been set up. This also means that once you transfer assets into the trust, you relinquish control over those assets.
Furthermore, for a trust to provide asset protection, someone other than you needs to be the trustee. However, you can appoint someone you trust to act as the trustee and manage the assets for you.
The trustee you choose will have complete authority over the trust and will only be limited by the terms of the trust. So, when you create the trust, you must be sure to specify the terms and parameters by which the trust must be governed.
Again, it is strongly recommended that you hire an attorney who is licensed in the state where the trust will be formed to assist you with this strategy. This is because forming a trust can be complicated and there is a lot that you will need to consider.
Protecting With Liens
It may sound crazy, but when it comes to asset protection, poverty is power. The first thing lawyers do when they are preparing to sure you look up the value of your assets.
You can use an encumbrance like a lien to make your assets look as valueless as possible. What is a million-dollar house worth if there is a $990,000 lien on it?
A lien is a charge against or interest in property to secure payment of a debt or performance of an obligation. Liens are enforced in the chronological order in which they are placed on the property.
A junior lien holder (a creditor for example) may foreclose, but proceeds first go to the senior lien holders (who is, in this case, you). If nothing is left over for the junior lien holder, they are simply out of luck.
Having existing liens on your property can make it look worthless to creditors. For example, you can take out a home equity loan on your primary residence, so that it shows up as a mortgage when someone googles you.
You can also borrow money from a protected entity that you own to buy an asset and then protect it by putting a lien on that asset from the protected entity. This can discourage a lawsuit because it will show that there is little value or equity in the asset.
These are but a few examples of the most commonly used asset protection strategies. For a more comprehensive run-down of available asset protection strategies, or more information regarding asset protection in general, contact an experienced Wyoming asset protection lawyer to arrange a consultation.