Legal asset protection planning often gets a bad rap as being something that individuals do who are looking to dodge creditors or evade taxes. However, this is simply not the case. In an increasingly litigious society, wealthy individuals face a substantial risk of losing everything to predatory lawsuits. The vast majority of people who utilize asset protection plans are hard working and law-abiding individuals. So, this article will give you insight, information and tips on how to to legally protect your assets from legal attack.
What is Legal Asset Protection Planning?
Legal asset protection planning refers to structuring assets in a way that shields them from the claims of potential creditors. Asset protection tools can range from very simple to very complex. An example of a simple asset protection tool would be an umbrella insurance policy. An offshore trust would be an example of a complex asset protection tool. One can use tools for legal asset protection individually or in combination with one another.
Why Is Asset Protection Planning Important?
The United States is becoming an increasingly litigious society. There are many different sources of liability that people in the US face today. The first step in legal asset protection planning is realizing the numerous threats to your individual wealth.
One can find some of the largest sources of liability in general negligence and the resultant court claims. These can arise from a variety of common circumstances, such as car accidents or slip and fall cases. Any individual of means is at risk of losing what they have worked so hard for. However, for those in high-risk professions like doctors and lawyers, the threat can be even greater. Even if the courts do not award a judgment, the cost of paying for a defense in litigation may be financially crippling.
Contract liability is another risk to consider with regards to legal asset protection. Breach of contract claims, consumer debt, and loan obligations are all considered examples of contract liability. Business owners are particularly susceptible to these types of claims. This is especially true if they personally guarantee business loans and other business obligations. They are at even further risk if they do business as a sole proprietorship or general partnership.
Another important form of liability for wealthy individuals to consider is employer liability. If a person is an employer, they face liability from lawsuits stemming from wrongful termination claims. Employees can also sue employers for sexual harassment; discrimination, or not complying with the Americans with Disabilities Act.
It is also essential to consider asset protection planning with regards to a wealthy individuals estate. Heirs to an estate may have substance abuse problems, gambling addictions, and creditor problems. These issues could result in an heir not using an inheritance as it was intended. This could be the case whether the creditors seize the inheritance or a spendthrift heir blows through it.
Perhaps the most frequently discussed reason for needing legal asset protection is divorce. There are no shortage of stories about disgruntled former spouses taking their ex to the cleaners. Nobody wants to think that his or her marriage will end in divorce. However, it would be foolhardy for wealthy individuals to ignore the potential risks associated with divorce.
Legal Asset Protection Vehicles
Despite the risks described above, there are a number of ways that wealthy individuals can protect their assets. One can establish a strategy before the need arises. On the other hand, there are those who need immediate protection. The tools described below are legal vehicles for asset protection for the long-term or right away:
One of the most common legal vehicles used for asset protection is liability insurance. Health insurance protects the assets of policy holders in the event that they get sick. Auto insurance protects policyholders if they get into a car accident. Homeowners insurance protects a person’s home in the event that a catastrophic event damages or destroys it. Another important type of insurance to consider is umbrella insurance. Umbrella insurance protects policyholders from major claims. It does so by providing additional liability coverage above the limits of homeowners, auto and other insurance policies. It also provides coverage for claims that standard policies may exclude. These include claims like libel and slander.
If an insurance company covers a claim, they will have a duty to defend the policyholder in court. They will also be required to pay the policyholder’s attorney fees. The caveat of insurance is that the liability of an event may exceed the insurance policy coverage provided. It is also possible that an insurance provider may deny a claim. For this reason, it is advisable to combine insurance with other legal asset protection tools as part of a well-rounded strategy.
The problem is that no matter how much insurance you have, someone can always sue you for more. Have a $1 million policy? Someone can sue you for $3 million, leaving you $2 million short. In addition, there are numerous exceptions written into insurance policies today If the insurance company wants to opt out of paying a claim, they will. So, to really insure protection, be sure to place your assets into the proper legal tools, which we will discuss below.
There are federal and state laws that protect certain types of assets from creditors. These types of assets are often referred to as exempt assets. Qualified Retirement Plans and IRA’s are examples of exempted assets. United States law protects any retirement plan covered by ERISA, including 401k plans, from the claims of creditors. Federal ERISA laws do not cover IRA’s. However, certain states, such as Illinois, classify IRA’s as exempt assets. Social security benefits, disability payments, unemployment benefits, and public assistance benefits are all considered exempt assets. The law also normally exempts life insurance proceeds payable upon the death of an insured to a spouse, parent, child or dependent.
The shortfalls with exempt assets are their limitations. You can only contribute so much to a 401K or IRA. The vast majority of one’s assets may be outside of these vehicles.
A homestead exemption protects the value of a person’s personal residence from property taxes and creditors. This exemption may be especially useful for legal asset protection following the death of a homeowner spouse. A homestead exemption is an automatic benefit in some states. However, in other states the homestead protection is not automatic. Homeowners in these states must file a claim for the homestead exemption. This claim must file a claim must be re-filed when the person moves primary residences.
A few states protect the entirety of one’s personal residence. Most states, however, have limited amounts of homestead protection.
Business people can use various business entities, such as corporations and limited liability companies for asset protection. The law considers corporations and limited liability companies as separate legal entities from their owners. Courts cannot easily subject the personal assets of the business owner(s) to creditor claims as a result of the debts and obligation of the business. Likewise, there are legal provisions such that the creditors of a member of an LLC cannot claim the LLC or its assets.
Wealthy people often utilize trusts to protect their assets. There are various different types of trusts that one can use to protect assets for a variety of reasons. Spendthrift trusts prevent beneficiaries from squandering their inheritance. The beneficiary’s creditors may not attack assets held within the trust because they have no discretionary control over the payments made to them. That power is given to the trustee.
One of the most valuable legal vehicles for legal asset protection is the asset protection trust. Asset protection trusts are self-settled spendthrift trusts. They allow individuals to act as both the settlor and the beneficiary of the trust. Asset protection trusts include a spendthrift clause that appoints a trustee in charge of distributions to the settlor of the trust. The settlor cannot directly control when a trustee will make distributions. As a result, a court cannot force the relinquishment of trust assets to their creditors.
A number of jurisdictions offer asset protection trusts. Trusts settled in the United States for the purpose of legal asset protection are often referred to as domestic asset protection trusts. Only certain states, such as Nevada, Delaware, and Alaska, offer domestic asset protection trusts. Domestic asset protection trusts can help to protect assets from creditors. They are, however, still within the reach of local courts.
Offshore asset protection trusts provide significant advantages over domestic asset protection trusts. In many favorable jurisdictions, the courts will not uphold foreign judgments. Creditors of the settlor of an offshore trust would have to travel to the jurisdiction where the trust is held. They would then have to go through the process of filing another lawsuit. This is quite a lot of work in order to try to obtain access to the assets in the trust. As a result, many creditors are discouraged from pursuing assets held in offshore trusts.
In fact, asset protection experts commonly call the offshore asset protection trust the strongest asset protection tool. Domestic courts do not have jurisdiction over foreign trustees. So, local court orders to return the funds fall on deaf ears.
The most effective legal asset protection structures available involve using multiple legal entities in favorable offshore jurisdictions. An example of a multi-entity structure would be using a trust in combination with a limited liability company. The trust should own the entirety of the LLC. You can then transfer assets into the LLC. You do this by opening an international bank account in the name of the LLC. Then you wire funds from your account into the offshore account held in the LLC name.
Under the laws of favorable jurisdictions, the settlor of the trust may also serve as the manager of the LLC. This means that under normal circumstances they can control the assets held in the trust. However, the settlor has the ability to transfer the managerial role of the LLC to the trustee in times of legal duress.
Once this happens, the settlor of the trust will be legally separated from ownership of the assets. This makes it difficult for creditors of the settlor to attack assets that are held within the LLC inside of the trust. The creditor would have to pierce through both legal entities in order to pursue the assets. Plus, as manager of the LLC, this gives you the remote control to your assets before times of legal duress. If the trust and LLC are both located in favorable offshore jurisdictions, it will be nearly impossible for creditors to touch the assets.