In these litigious times, protecting your money from a lawsuit means doing more than just locking it up in a bank vault. Even insuring your assets may not be enough to keep them safe from a determined and cunning creditor.
So, if the most time-honored methods of wealth defense aren’t enough to keep your assets safe, what can you do to ensure your financial security? In this article, we’ll explain exactly how to protect your money from lawsuits using tools like offshore asset protection trusts (OAPTs) and more:
- Why Do You Need to Protect Your Money From Lawsuits?
- What Can You Do to Protect Your Money From Lawsuits?
- Asset Protection Trust
- The Best Time to Set Up an Asset Protection Trust
- Where to Establish an Asset Protection Trust
- Domestic Asset Protection
- Limited Liability Company (LLC)
- Asset Protection Strategies for Protecting Cash From Lawsuits FAQ
Why Do You Need to Protect Your Money From Lawsuits?
The U.S. has only 4.4% of the world’s population, but a far larger percentage of the world’s lawsuits happen within its borders. When your assets are at risk of seizure, an asset protection strategy becomes more of a necessity than a luxury. Without a strategy in place, you run the risk of losing everything in a lawsuit.
What Can You Do to Protect Your Money From Lawsuits?
How can you make sure the assets you worked hard for do not end up lining the pockets of your opponent? The best way is not to hide your assets; it’s to divest yourself of them in the proper legal tools. When you don’t own anything, it is likely that your creditors won’t get anything, even if they manage to win a judgment against you.
Now, you might be wondering, “When I divest myself of my assets, do I then end up with nothing?” The answer, fortunately, is no. Establishing a trust or an LLC has proven to be an effective means of separating yourself from your assets. Setting up these tools also protects your money from predatory claims.
Although trusts and LLCs are quite different from one another, both can provide a significant degree of security for your assets. We’ll discuss each in detail to help you choose the one that is better suited to protect your money.
Asset Protection Trusts
Asset protection trusts are a specific type of trust designed to protect a person’s money and other possessions from creditors. When creating an asset protection trust, the creator, also known as the settlor or grantor, cedes ownership of and control over their assets to a trustee that they select. This trustee is bound by the rules outlined in the trust agreement, which sets forth guidelines for managing the trust.
Now, this arrangement might seem like it requires you to give up a lot of control in order to gain protection. However, that’s not entirely the case. A professionally established asset protection trust still allows the settlor to maintain a strong degree of control over their assets. Until legal trouble arises, you can use your assets freely. If you are ever sued, you simply hand over control of any accounts and LLCs owned by the trust to your trustee to help ensure your wealth remains protected. After any legal troubles subside, your trustee will cede those positions back to you.
Ultimately, by distancing yourself from your assets, you place them beyond a creditor’s reach. The less control you appear to have over your assets when a creditor wins a judgment against you, the less likely it is that said creditor can do anything to get their hands on your money.
The Best Time to Set Up an Asset Protection Trust
The best time to set up an asset protection trust is before a creditor files a lawsuit against you. U.S. courts are often suspicious of any transfers made after a cause of action, such as a divorce, contract dispute, car crash, or the dissolution of a business, takes place. However, if you already have a trust in place before any of these events happen, it’s difficult for a judge or creditor to paint your trust as a tool for fraudulent conveyance.
Where to Establish an Asset Protection Trust
To ensure you can protect your cash from a lawsuit, you need to establish your asset protection trust in an offshore location. These trusts, known as offshore asset protection trusts (OAPTs), are far stronger than those established in the United States. There are a few reasons for their superior strengths, but one stands out above the rest: the ability to resist foreign judgments.
Essentially, when you set up a trust in an offshore location, that trust is subject to the rules of the jurisdiction in which it is located. By extension, the trust is no longer governed by the laws of the United States. Even if a creditor wins a lawsuit against you, the U.S. court ruling that they present to your trustee will have no power whatsoever. To even stand a chance at getting their hands on your cash, your creditor would need to file a new lawsuit in the offshore jurisdiction where you’ve set up your trust. Doing so is extremely expensive, time-consuming, and unlikely to work out in favor of your creditor. In most cases, creditors simply give up once they realize your assets are guarded by an OAPT.
Domestic Asset Protection
We’ve already explained why an offshore asset protection trust is the best tool for protecting your cash from lawsuits. Now we’ll explain why a domestic asset protection trust falls short. The major drawback of a domestic asset protection trust is that the trust and its assets are under the control of U.S. judges. If a judge decides that your trust was established too recently or created for the sole purpose of defrauding creditors, there’s little you can do to push back against them. Even worse, a judge from any state can make a ruling against your trust. So, if you establish a domestic asset protection trust in a state with debtor-friendly laws, like South Dakota, but are taken to court in a creditor-friendly state like California, the ruling against you will still apply.
Limited Liability Company (LLC)
An LLC combines the limited liability protection of a corporation with the favorable tax benefits of a partnership. An LLC has a unique legal identity that is separate from that of its owners. The owners, known as members, are legally protected from any lawsuits lodged against the company. At the same time, the company is insulated from any lawsuits against its members. The legal separation between members and the company makes LLCs an excellent tool for limiting the damage a single lawsuit can cause.
Another advantage of using LLCs for asset protection is that a company can engage in commercial or trading activities set forth in the statutes and the articles of organization. Members can enjoy the benefits that an LLC generates, including salaries, perks, and bonuses, without having to own the company’s assets.
You have to be especially careful when setting up an LLC. Its ability to protect your cash from a lawsuit largely depends on courts viewing it as a legitimate company. If a creditor can prove that the LLC is nothing but a sham company that you set up improperly, the judge can nullify the protection it affords.
To ensure an LLC continues to protect your assets, you need to clearly separate your personal possessions from those of the company. For example, you cannot use a company card to pay for personal expenses, and you can’t use personal assets for business purposes. If there’s not a clear separation between you and the LLC, a judge could rule that the LLC was merely an extension of you, which allows lawsuits against the company to affect your personal possessions, and vice versa.
The real strength of an LLC, however, comes from its ability to enhance the protection afforded by an asset protection trust. By placing an LLC inside of a trust, the settlor can maintain a high degree of control over any trust-held assets. This technique eliminates the main drawback to an offshore asset protection trust, which is a loss of control over your trust-held assets.
Asset Protection Planners Can Help You Legally Protect Your Money From Lawsuits
Protecting your assets from judgments may mean giving up a certain amount of control over them, if only temporarily. Ultimately, this brief sacrifice is well worth the security that a well-crafted asset protection strategy can provide.
If you’re ready to protect your cash from lawsuits without sacrificing your control of it, Asset Protection Planners can help. Our team has set up countless offshore asset protection trusts and has never seen a single one of our Cook Islands trusts get breached by a creditor. We also have decades of experience establishing LLC structures that allow you to direct the use of your assets without putting them at risk during a lawsuit.
Don’t leave your wealth unguarded. Get the security and peace of mind that only a professionally established asset protection plan can provide. Contact us today for a free consultation.
Protecting Cash From Lawsuits FAQ
How can you protect cash from a lawsuit?
Protecting cash from a lawsuit requires you to create separation between you and your assets and to use offshore tools that a U.S. court order can’t touch. The core tools are offshore asset protection trusts, often paired with LLCs.
Traditional tools like liability insurance, umbrella coverage, and retirement accounts help, but on their own, they are often not enough to stop a determined creditor who wins a large judgment. Asset protection trusts are the final failsafe to protect your cash from lawsuits when more traditional tools fall short.
To truly protect your wealth from a lawsuit, you need to set up an offshore asset protection trust in a reputable jurisdiction like the Cook Islands or Nevis. These offshore locations have longstanding laws and statutes that make it nearly impossible for a creditor to breach a trust.
Once your trust is established, it’s wise to place an LLC within the trust. This LLC owns some or all of the assets inside the trust. By sitting at the helm of this LLC, you can control your trust-held assets without putting your wealth at risk. If you are sued, or believe legal trouble is coming, you can cede control of the LLC to your trustee. At this point, the assets are completely protected, as you have no direct control over them anymore. When your legal troubles subside, the trustee will return the LLC to you, and you can continue directing the use of your assets.
Keep in mind that all of the above should be carried out with the help of an asset protection professional. With their help, you can set up a wealth defense strategy that can safeguard your money against pressing threats, all without losing control of what you wish to protect.
Here’s a step-by-step guide detailing how to protect cash from lawsuits:
- Gather a list of all your cashtype assets, including bank accounts, brokerage cash, business reserves, and emergency funds.
- Assess your lawsuit exposure by considering your business activities, real estate holdings, and other risks. Certain professionals, such as doctors, have an increased risk of being sued.
- Check to see if you are using any asset protection tools already, such as liability insurance, umbrella coverage, or corporate structures.
- Talk with an asset protection planner and discuss the risks you are facing. Mention any of the strategies you have used in the past to protect your money.
- Work with your planner to select the right jurisdiction for your asset protection trust. Popular choices include the Cook Islands or Nevis.
- Choose a trustee from a list that your asset protection planner provides.
- Have an asset protection planner design your offshore asset protection trust. They will handle formation documents and the establishment of offshore accounts.
- Wait for your planner to set up an LLC inside of your asset protection trust.
- Follow your planner’s instructions on how to fund the trust. You will likely move your assets to the LLC inside the trust.
- Use the LLC as a way to continue managing your assets without incurring additional risk.
- If a lawsuit ever starts, or you believe one will, cede control of the LLC to your trustee.
- Wait for the lawsuit to conclude, and be ready to defend against any challenges from your creditor.
- Once the lawsuit subsides, regain control of the LLC from your trustee.
- Have your planner continually monitor the legal landscape of your chosen jurisdiction and make updates to your asset protection plan as needed.
