Why is Asset Protection Important?
Everyone has heard the real story of a successful business owner, who lost an unfairly adjudicated lawsuit or related litigation. The justice system does its best for the most part, but that isn’t even the issue. If you are unlucky enough to be on the losing end of a major litigation, and you own a business, you will have wished that the thought of protecting your assets had come up in conversation, before the judge’s gavel banged out your punishment. Because if asset protection has never been important to you before, it may be too late to protect your assets. So act while the skies are clear. Once legitimate and verified creditors come calling, courts do not smile on last minute transfers. In other words think of it this way: just as if you can see a tsunami coming your way, you are unlikely to outrun it – and if you have never protected your assets, once the legal decision against you is cast, your assets may already be adrift.
Well, anyone with a heart is reasoning, the person’s residence won’t be sold, people have to live somewhere. Guess again, because that is usually the first asset to be sold, as well as a business owner being forced to sell off a booming business, business related assets, a legitimate family domicile or personal residence, as well as other available assets (cars, boats, you name it if you own it). How has this escaped the masses? It hasn’t since people who own assets are realizing in the “lessons learned” folder of life that when an asset is purchased is the time to garner that important protection from creditors, any other time could be too late.
Handle Your Business – Manage Your Assets
No one anticipates losing litigation, not even a savvy business owner. This is true, just as no one anticipates an automobile accident. Both just happen as a part of life. It is not part of anyone’s life plan for success, to be forced into unrelenting debt attempting to settle a claim for this type of calamity. But there is good news. It is never too late to develop a firmer understanding of asset protection, and to start to make definite plans to protect your assets for a secured future for the business and the family.
Asset Protection and Estate Planning 101
An estate can be of any size, and is only limited by the assets included therein. Everyone needs to protect assets from litigation with estate planning. There is no reasonable reason to leave this important set of assets to chance distribution when it is a simple endeavor to develop the path to protection as soon as today. For example, spouses interested in protecting assets during estate planning can use a testamentary trust (Unified Credit Bypass Shelter Trust or UCBST) funded on the death of the first spouse. This allows the trust owner to avoid the asset donation to the state which results whenever an individual misses the boat and allows non-planned estate transfers. The UCBST assets are exempt from Federal estate taxes, and enjoy possible reduction of state tax assessments.
Are Business Assets At Risk?
Every business has assets and every business asset is potentially at risk in an adverse decision from a lawsuit. Some businesses are owned by one spouse only, who also runs the business as a sole business owner. If business assets are held between married spouses, the business owning spouse holding title to the asset should manage asset protection of business assets, while the non-business spouse should separately manage the title to any family personal assets. Why is this the best way to go for a business couple interested in protecting assets from litigation? Because as a co-owner of an asset (with a business and a non-business related spouse) the IRS may infer that both spouses are “responsible parties” in liability situations (such as trust tax arrearages on unpaid employee income tax, for example). As the IRS enacts sanctions, or worse, goes in to place levies on the assets, the family assets of the non-business spouse could be thrown into the general asset pot for the resolution of litigation against the business owner. This is arguably not the best outcome for a family who had intended to keep business assets separate, but never got around to protecting the assets from this situation.
What About Retitling Assets?
Assets can be retitled, bought or sold to others. It happens as an everyday occurrence in business transactions. The business owner considering retitling an asset needs to use caution as to when to retitle an asset. This is to avoid fraud, or referenced legal “badges of fraud.” A badge of fraud can include a transfer of property rights that are transferred or sold for less than the property is worth in general real estate markets. Another example is a fraudulent transfer of an asset when a business owner is insolvent, or anticipating a lawsuit from creditors. These situations fall under an appearance of impropriety and should be avoided, as it could signal fraudulent transfers of an asset. The bottom line is that last minute transfers of assets to family members almost never holds up in court. Best to converse with an asset protection consultant and establish the proper legal tools instead.
Estate Planning for Family
Business and nonbusiness spousal owners of a company (or a solo business owner) need to continue the theme of keeping family assets separate for estate planning purposes. It is a better option to allocate assets among business and nonbusiness related spouses, which protects a testamentary trust, for example, and allows the surviving spouse the benefit of the unified tax credit to enhance family estate tax savings overall.
Retirement Plans and Asset Protection
That answer turns on if the plan is an ERISA covered plan or not. Exempt plans that creditors cannot raid include: profit shares, ESOP money, purchase pension plans, target benefit plans and 401(k) plans. Any non-ERISA plans would need state bankruptcy exemptions to be afforded any real protection against assets.
Nice and Snug, Seriously
Trusts that are created as irrevocable with no retention of benefits are the best protection from creditors looking to seize assets in the trust’s name. Otherwise, a creditor can revoke a revocable trust and the assets can be dissolved. IRS Revenue Ruling 76-103 notes that trust transfers are completed gifts (with no estate tax), if the state law disallows attachment of the trust principal by the creditor. Always start with the purpose of a trust, and determine if the trust purposes can be served as irrevocable or revocable (keeping in mind creditor access) when creating a trust.
State of Residence and Protection of Assets
Anyone with business assets also has business liabilities. If a business owner moves to another state to establish residency, the individual should consider if the new domicile will be permanent or not. There can be advantages for asset protection in one state over another, and estate taxes can vary by state. The question the IRS will ask is whether the individual is a permanent resident of the state. The permanent residency of an individual is determined by many factors, including if the taxpayer resides in the state fewer than 183 days (that’s over 6 months), whether there is a home there for the individual’s family and whether the person’s bills come to that address.
Do You Need LTC Insurance?
Many people of all ages purchase Long Term Care (LTC) insurance, because the rates offered at the time of purchasing the policy are advantageous, or because some people are better than others for planning ahead for life after retirement. Carefully look over the proposed LTC insurance policy to determine if it will meet the needs for a nursing home when the time comes to use one. Review what the policy is meant to cover, which should include looking at: the daily benefits that will be allocated for nursing home care, how long the benefits will be payable (in years or the maximum allowances), waiting and elimination periods to when the LTC benefits begin, what illnesses or conditions are specifically covered for LTC benefits, whether inflation adopted for the daily benefit amount, discounts for joint spousal policies or benefits, potential premium waivers and company ratings of the issuing organization.
LTC and Asset Protection
Long-term care policies may be eligible for asset protection. Consider those LTC policies participating in a partnership program (such as the Robert Wood Johnson Foundation). These programs monitor LTC plans to allow unlimited asset transfers with no penalties, to reduce income generated from pensions, etc., or use non partnership LTC policies (for possibly 5 years) with advantages for individuals looking for LTC policy coverages.
Foreign Trusts Thwart U.S. Courts
Foreign trusts can be created outside of the United States to protect assets. Is this the best way to protect an asset? Most people would not think of utilizing a foreign trust as the first line of protection for assets. But there are some business owners who have had the idea to take an asset out of the United States, and create a foreign trust to hide and asset in an effort to protect it. In this case, U.S. courts understand the laws meant to hide U.S. assets in foreign lands.
Using such a trust to protect assets from lawsuits is fine. In fact, it is likely the strongest form of asset protection available. But keep in mind it is a tax-neutral phenomenon and you are expected to report its existence to the IRS. The IRS notes that these trusts usually have American beneficiaries and are perfectly legal if you follow the simple rules. Grantor trusts created under IRC section 671 require the trust creator to file Form 3520 when you file it, and the 3520-A with your personal returns. That’s the Annual Information Return of Foreign Trust With a U.S. Owner. If the proper forms are filed, using this powerful tool to shield assets is perfectly acceptable, and very effective, we might add. It is just important that it is established properly by an experienced professional and that you have a CPA to file the requisite forms.
Act Now, Don’t Pay Later
Asset protection is a type of insurance policy that hard won assets will remain in the owner’s hands after a lawsuit or even after the death of the asset owner. It is important to avoid making uninformed donations to state agencies, because no thought for an estate plan was made before the death of the owner of an asset. It is equally critical to protect assets such as a primary residence from being seized to satisfy a lawsuit. Asset protection benefits everyone, and whether there are many homes or one treasured domicile, protecting assets today allows the full use and enjoyment of those hard won assets tomorrow. If you believe that the asset of the home is not worth protecting before the fact of a negatively adjudicated litigation, you will be proved right. Don’t let this happen to you, and develop a plan for protecting all assets right now.
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 Karl, P. (2000). Twenty questions on protecting business and family assets. CPA Journal, 70(2), 32-37. EBSCO Database: Masterfile Premier.
Poppy Johnson, JD