Once an individual has made the decision to protect their wealth the first step is to assess the assets and determine what risk and liability should be planned for, this will determine how much protection is necessary. One’s comfort level and to some extent, budget, will also guide the beginning stages of asset protection planning.
Asset protection planning that begins with an estate planning initiative is the strongest and most preferred way to start planning.
Protecting savings and liquid assets is different than protecting the family home, future income and real property. When an asset portfolio is assessed, the assets and their value can be compartmentalized whereby risk and liability is limited through separating them using legal tools.
Limiting liability is done through separating assets. When everything is tied to an individual’s name, all of the assets are at risk should s/he be a named defendant in a lawsuit. A slip and fall incident on a rental property can jeopardize the owner’s personal assets without legal separation through some kind of asset protection. Protection begins by separating risk and liability from one’s wealth in a financial plan.
When an asset protection plan is in the design stages the personal preferences and one’s own comfort level will play a big role. When using legal entities to protect assets there are annual expenses, reporting and operating formalities for each – typically this is a single statement of information and nominal annual state fee – these legal entities provide protection and limit the liability of the shareholders or members. Some people are more comfortable with multiple entities and prefer a higher degree of legal separation of risk and assets, where others prefer a simpler approach.
Depending on how much risk one’s business, occupation, lifestyle or personal situation poses to their assets, a financial plan’s complexity will somewhat be determined. A guideline in developing protection planning will be the value of the asset(s) being encumbered into protective vehicles and the nature of the asset(s). Some assets have internal liability that should be separated, for example: a business with vehicles and employee drivers is a huge liability with massive amounts of risk, the business assets, intellectual and real property can be encumbered by separate business entities whereby a lawsuit resulting from an at-fault employee auto accident does not jeopardize the other assets of the business. This concept holds true for personal assets and protecting one’s real property. Separating assets from as much risk and liability as necessary, possible or that one is comfortable with is the framework for beginning asset protection planning.
Asset protection planning should be conducted in compliance with all laws and implemented without any intent to defraud or intentionally shelter your assets from those who may have a fair request to satisfy an obligation already made. The moral decision is based on taking action to reduce the exposure of your assets to future creditors, frivolous lawsuits or unwarranted liability.
Some legal tools and instruments are designed solely for limiting liability and protecting the wealth of individuals that are well understood by the courts. It is up to you to secure your wealth by taking advantage of these tools and resources.
Protective Planning and Action
Most of us believe that seeking legal help is a reactive initiative – hiring legal assistance only when you need to respond or defend against something. In the case of asset protection you are assembling the resources when times are good. Timing is critical to creating legal protection of your finances – courts can challenge and negate a desperate transfer of assets in the face of a threat. Most individuals will take asset protection seriously only when they are faced with a lawsuit or a pending legal threat.
Relying on a financial foundation that is protected by a skilled plan is peace of mind for you and your family. Correct and proactive measures are the only way to achieve the highest amount of security.
Points to Remember
- Asset protection is legal and moral
- Solid planning is critical to protecting your financial future
- Accept the legal system for what it is and take measures that protect you
- Asset protection is a continuous commitment
- You should to work with experienced and qualified professionals
- Protect all of your assets, even future assets
- The most secure starting point is right now
Things to Avoid
There are a number of ill-advised actions that have been attempted in the face of legal threats: gifting assets to a trusted friend, spouse or children, selling them for less than market value and many more. The true test of an asset protection maneuver or action is whether or not your creditor can persuade the court into ruling that your action was a deceptive act to transfer assets out of their reach. Court cases have stacked up defeating desperate transfers.
Passing the Test
It is best that your asset protection plan pass the fraudulent conveyance test in order to succeed in a court of law. Last ditch efforts to move assets during legal duress are rarely successful and can bring fines and even criminal charges. You cannot bypass financial obligation by tossing your assets to someone you trust or another equally injudicious attempt to shelter liability from a valid creditor claim.