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Asset Protection Basics

Asset Protection basics that will cover legal concepts, tools and asset protection strategies in plain English. Asset Protection Planners has helped protect millions of dollars in liquid assets, tens of millions in real estate and hundreds of millions in investments for our clients. We’ll address the popular topics and questions about asset protection.

Asset Protection from Lawsuits

When you have accumulated assets over many years of hard work, the last thing you want is to lose them due to some litigation issue, bankruptcy, or court judgment. However, such incidents can be avoided with a bit of preparation and planning. Using asset protection strategies can put a stop to losing assets should you ever run into any serious problems.

Regardless, it can be difficult to understand the laws passed regarding asset protection and how particular types of assets may be legally shielded. However, when you look at the statistics, 96% of the lawsuits in the world are filed in the United States. Therefore, if you live in the US, understanding how you can protect your assets from lawsuits becomes critical. To understand how to protect your accumulated wealth from lawsuits, this article covers various aspects of asset protection that can help shield you in case of litigation.

Your Assets Are at Risk

Many individuals with assets incorrectly assume that since they follow laws correctly, they could never be sued. Others think that asset protection is only necessary for people with careers who are common targets of litigation, such as physicians, building contractors, etc. However, the notion that “playing nice” or being in a profession with less perceived liability protect assets from litigation in the real world is both a dangerous and incorrect perception.

There are several uncontrollable life occurrences that can create legal issues and threaten your assets. However, the problem with these types of circumstances is that many people believe these things won’t happen to them when, in fact, they can happen to anybody, and very unexpectedly. If you have not approached the idea of establishing an asset protection plan yet, you might lose your assets and possibly be forced to file for bankruptcy, wind up in a divorce battle, or must defend yourself in a civil lawsuit.

Many more unexpected issues exist that could put your assets at risk. For example, say you are the parent of an adolescent that winds up on the wrong side of a car accident, and the injured party decides to sue you over the incident. Did you know that most devastating automobile accidents result in lawsuits of far greater than the insurance coverage? This litigation could result in you losing all of your vulnerable assets to the other party. Since many of these issues are difficult to predict, it’s best to seek out an asset protection plan before anything that might endanger your wealth occurs.

Retirement Plans and State Law

In the United States, both federal and state law dictate how your assets can be shielded from a court decision. What follows below is an example of various assets and the how the law works to shield those assets. The purpose is to provide you with an overview of how you can legally protect some of your assets to avoid their loss should litigation occur.

  • Traditional IRAs and Roth IRAs, as far as court proceedings are concerned, both can be protected from loss in bankruptcy court. The cap for asset protection with both types of IRAs is one million dollars. The bankruptcy court may decide to adjust this to a higher number. Furthermore, certain plans that have been rolled over, like 403(b) and 457(b) plans, come with no limit to their protection. It is important to note that the cap of protection is only for bankruptcy court proceedings and is not applied in other court decision. When court proceedings outside of bankruptcy court occur, state law generally dictates the level of protection.
  • Certain types of retirement plans receive no limits on protection from both bankruptcy and creditors. Retirement plans received as an employment benefit, whether or not the plan receives coverage from the Employee Retirement Income Security Act (ERISA), fall under this category.
  • An unlimited cap also protects ERISA retirement plans with two exceptions. First, if there is a qualified domestic relations order, it may allow the courts to remove your assets and hand them over to a previous spouse or payee. In these cases, that shield can be lifted. Second, if something happens and the IRS hits you with tax levies, the veil of protection is lifted. Therefore, certain qualified plans do not count as ERISA plans if that plan only protects the business owner or owners (also called owner only plans). Owner only plans do not receive the same level of protection and state law cover these types of plans.
  • Depending on what state where you live, you may or may not have protection from having your home confiscated in a lawsuit. Some states offer significant protection to homeowners and others offer no protection at all. So make sure you understand the homestead protection laws in our state.
  • Annuities and life insurance protection may offer some protection, however the rates of return on the money put into these plans are usually poor. State law also dictates whether or not annuities or life insurance are protected. In some states, the cash surrender values of life insurance, as well as earnings from an annuity contract are protected. In other states, protection is offered to the beneficiary and his or her interest to the extent that it provides a meager living. However, some states offer no protection. Therefore, become aware of your state’s requirements and how they might affect you.

A Few Easy Steps

Although some people still seem to approach asset protection with a knee-jerk reaction after they are sued. There are many sound and solid legal ways to protect your assets, but the protective measures almost always work best when put in place before a legal attack. Optimal asset protection planning means putting up your defenses up before any creditors launch attacks to access your wealth.

When your assets are already protected, and you encounter a lawsuit, the creditors know, or will quickly find out, that they will have difficulty getting through your defenses, and may not bother to try. Instead, this creditor will be more likely to seek a settlement rather than attempt to wade through the legal process and costs of attempting to reach protected assets.

Here are a few approaches you can take to protect your assets. The following list provides a breakdown of some of some of the most powerful asset protection steps you can legally take to ensure the safety of your wealth.

1. Asset Protection Trust

Form an asset protection trust to keep your wealth safe. Asset protection experts agree that forming a trust in places such as the Cook Islands and Nevis offer the strongest defense, An onshore trust formed in a state may also be an option for you, especially if you live in one of the few states that offer asset protection trusts. Some of the states that currently offer asset-protection trusts, include Nevada, Alaska, Rhode Island, Delaware, and South Dakota. In most offshore and onshore trust jurisdictions, an individual is not required to be a resident of the state or country where he or she is seeking to form the trust. Because the offshore trust has a trustee that is outside of your local court’s jurisdiction, that trustee is not required to abide by your local court orders. If your local judge demands the money in the trust be forfeited, the foreign trustee can refuse to comply. Domestic trusts do not have this advantage.

With an asset protection trust, an independent trustee is put in place to oversee the trust. Assets placed into this type of trust will be difficult for creditors to seek out during litigation. Some of these trusts offer so much protection that you can even seal them off from ex-spouses should you decide to do so.

To ensure you form your trust correctly so that your trust protects your assets, your trust must comply with the following requirements:

  • You must make sure that when you form the trust, you make it irrevocable. With an offshore trust, you can actually make changes to the trust with the trustee’s assistance.
  • You have to appoint an independent trustee. This independent trustee must be either an individual with residency in the same jurisdiction as the trust. This can be a licensed trustee, in some cases, a bank.
  • The trust must include a rule that allows distributions to occur only when the trustee agrees to them. (There are also safety-valve provisions for you to change trustee if your trustee does not cooperate.)
  • The trust must also include a spendthrift clause. A spendthrift clause is wording in a trust document that prevents creditors from attaching the trust assets before they are distributed to the beneficiary.
  • With a domestic trust, depending on the state, either part or all of the assets needs to be found within the same state that you form the trust in.
  • With an offshore trust in the Cook Islands, Nevis and Belize, assets can be located anywhere. That being said, the assets should not be located in a jurisdiction (such as the US, or a bank with US branches) where they can be seized, regardless of whether or not they are in the trust.
  • The trust’s administration, as well as its required documents, need to be located in the jurisdiction where the trust is created.

For those individuals who wish to pursue an asset protection trust, remember that you should seek assistance from an asset protection specialist when forming your trust. This action will greatly enhance the likelihood that the trust will be established properly. There are simply too many variables that could expose your assets to lawsuits. After all, this is your money.  If you do not establish trusts for a living and keep up on the day-to-day changes, you would be putting your assets at great risk. Don’t rely on an amateur. Spend what it takes to have it done right. There is a number or inquiry form on this page for more information.

2. Accounts-Receivable Financing

Borrow against your accounts receivable. There are financing companies that will so so. This may help make your receivables much less tempting for creditors. So, using your business receivables, and borrow against them. Once you do this, you can then move the cash to an offshore asset protection trust to keep it out of harm’s way. By moving your wealth from easy-to-get to hard-to-get, you help decrease the value of the business assets and make them very unattractive for creditors.

3. Equity Stripping

Much like accounts-receivable financing, equity stripping requires you to take out a loan against the asset, and then transfer the money received from the loan into a legal tool that protects your assets. By stripping the equity out of certain assets, such as real estate and equipment, and transferring them into asset protection tool, such as an offshore trust, you make your equity much less interesting to creditors. Equity stripping decreases the value of the assets moves the loan proceeds into a financial fortress, making it much more difficult for creditors to take what is yours.

4. Family Limited Partnerships

A family limited partnership (FLP) offer an excellent asset protection opportunity. When forming an FLP, assets are usually moved into it and traded for an interest in the partnership. Once the assets are placed into the FLP, the Uniform Limited Partnership Act helps to shield those assets from creditors. Furthermore, the owner of the FLP can maintain the FLP itself as well as the assets. As far as your limited partner shares go, there is no significant market value for them. Therefore, your share value, for accounting and tax purposes, may be worth much less than what the originally transferred asset was worth, possibly saving you money in taxes. (Talk with a knowledgeable, licensed tax advisor.)

Asset Protection Tips

Asset protection tools aren’t limited to legal entities, trusts and other popular protection vehicles, an asset protection tool can be as common as auto and homeowners insurance, for example. You probably already have some form of protection the cover small vulnerabilities. Driving is probably one of the most dangerous things you can do, so how could you start protecting your assets at the source vulnerability? Be insured, not just insured, but purchase the maximum coverage available. Try getting insurance for your home and cars from the same provider and have a single policy that protects you from liability in an automotive accident. Before your assets are at risk from a legal opponent, implement everything you can do that will create a barrier between your assets and a legal predator. Purchase and lease vehicles under your own name and if you’re an entrepreneur, write off the expense, but don’t title your vehicle to your business, that is extremely hazardous and exposes your business revenue and its assets to the legal system. Just with this one type of asset protection in the form of automotive insurance, you are protecting yourself from being held personally liable in the event of an accident. The most coverage you can purchase is the goal here.

Doing it Right

There are some things you need to be aware of and know about, some types of (so called) “asset protection” will actually land you in criminal court, put all of your assets at risk or both. This is how you can spot an asset protection scam or a tool that will get you in some hot legal water.

What Not to Do

  • Tax Savings – Anything that says that your asset protection plan will save you money on taxes is a one-way ticket to trouble. Protecting your assets and your tax liability are not related. U.S. Citizens are responsible for taxes on a worldwide income basis, your money can be held anywhere, you owe taxes on your income, regardless of where it comes from. Do not let anyone advise you that an asset protection plan, tool or strategy is a “tax free” initiative or will “save you money on taxes”. To name a few asset protection scams, Common Law Trusts, Constitutional Trusts, Deceptive tax plans, Nevada Trusts, Massachusetts Business Trusts or anything with an agenda that has to do with your taxes.
  • Hiding Money – How bout we just put our liquid assets into a private, numbered or secret account in a banking jurisdiction and call that asset protection? Anything deceptive in nature is not a good idea, you do not have to lie, hide, scam or cheat a system to have a strong asset protection plan and legal strategy that is bulletproof.
  • Give It To Your Mother – How bout you just sign everything over to someone else, and you don’t have to worry about someone getting your assets if you are defeated in a court of law? Not a good idea, you still have your assets unprotected and within reach of the legal system and its players.

Where Lawsuits Come From

  • Occupation – We specialize in highly sued professionals and business owners offering planing and strategies that shield your personal assets from the liability hazards of your profession or type of business.
  • Property – Tactics and planning that protect you from internal liability of property ownership and real estate investments as well as property protection from external liability are common for many of our clients.
  • Divorce – With proactive planning you can set aside your business income and personal assets from a marital property battle.
  • Employees – We plan and protect you from frivolous lawsuits and civil litigation from disgruntled or terminated employees.

Total Asset Protection

There is only one type of asset protection tool that has yet to be broken and that’s the Cook Island Asset Protection Trust. This is how you take all of your assets and simply remove them from the U.S. legal system and put them into a legal system that discourages frivolous lawsuits and makes a very expensive, time consuming and near impossible arena for a legal predator to prey. This website will walk through this in more detail as we cover the rest of the subjects.