Asset protection planning is not a field of one-size-fits-all solutions. Rather, it requires careful strategy and the use of specific tools that can best protect the unique holdings of a single person or company. To tailor a strategy, wealth management professionals use a variety of legal tools to protect assets. In this article, we’ll explore 10 asset protection, estate planning and privacy tools that are widely used in wealth defense plans:
- Living Trusts
- Land Trusts
- Title Holding Trusts
- Offshore Asset Protection Trusts
- Limited Liability Companies (LLCs)
- Limited Partnerships
- Annuities
- Corporations
- Equity Stripping
- Liability Insurance
1. Living Trusts
Living trusts are a type of trust formed while its creator (known as a settlor or grantor) is alive. These trusts are made up of three key parties:
- Settlor/Grantor: This is the person who creates the trust and funds it with their assets.
- Trustee: Trustees manage the assets held within the trust and are legally viewed as the owners of those assets. They can be an individual or a company, but must not be an employee or relative of the settlor.
- Beneficiary: Beneficiaries receive some form of financial benefit from the trust. Common examples of benefits include regular distributions and inheritance rights. In certain cases, the settlor can serve as a beneficiary.
In addition to having three main parties, living trusts come in two formats:
- Revocable trusts: Revocable trusts, as the name implies, can be revoked or changed at the behest of the settlor. This style of trust is useful for people who want flexibility in a trust structure; unfortunately, it provides almost no protection from creditors.
- Irrevocable trusts: Irrevocable trusts are very difficult to change or revoke. This might sound disadvantageous at first, but it is actually a key benefit of the trust. Since irrevocable trusts cannot be changed, creditors cannot touch the assets within, even if the creditor wins a lawsuit against the grantor. For this reason, all asset protection trusts (APTs) are irrevocable.
Both of the above trust subcategories have their uses. They can make estate planning easier, provide grantors with access to income-based benefits like Medicare, and even provide beneficiaries with steady income. Just know that only irrevocable trusts are used as a legal tool to protect assets.
2. Land Trusts
Land trusts provide privacy of ownership for real estate. In this type of trust, the trustee holds property titles, while the beneficiary retains use of the property without placing their name in public records. The settlor of a land trust is typically the original property titleholder and the beneficiary.
In most land trusts, the beneficiary manages the property. They can collect income generated by the property, live in it, and even sell it if they wish. This high level of control means that land trusts are not used to protect assets from creditors directly. However, because they hide the settlor’s name from property records, these trusts make it difficult for lawyers to perform an asset search, deterring lawsuits.
3. Title Holding Trusts
Title trusts work like land trusts, but are used for personal property, as opposed to real estate. With this type of trust, the owner of personal property, such as an automobile, a mobile home, or a piece of valuable equipment, can transfer the property to a trust and gain privacy of ownership. An attorney looks in the public records and does not see your name associated with an expensive automobile. This makes it less likely for the attorney to take the case against you on a contingency fee basis.
4. Offshore Asset Protection Trusts
The most powerful asset protection tools available are offshore asset protection trusts (OAPTs). These are irrevocable trusts established in a foreign jurisdiction where the laws are designed to defend trust-held assets from creditors.
OAPTs are considered the most powerful method of asset protection for many reasons, but the simplest one is this: They can refuse domestic court rulings.
If you lose a lawsuit in the United States and have an offshore trust, that ruling means nothing to the trustee living in your chosen jurisdiction. Your creditor can demand your assets all day long, and your trustee won’t follow the ruling. In fact, they are actively prevented from giving in to creditor demands by the local laws in the jurisdictions where we establish OAPTs.
Now, compare that level of protection to what’s offered by a similarly structured domestic asset protection trust. A domestic trust, even one set up in a trust-friendly state like South Dakota or Nevada, can be easily breached by an ambitious judge. The United States requires judgments to be upheld across each state. So, the protections of trust-friendly states can be easily undone by a lawsuit in a creditor-friendly state like California.
5. Limited Liability Companies (LLCs)
A limited liability company (LLC) can create a barrier between the company and its owner(s). This separation gives individual owners (called “members”) limited liability protection from threats. For example, if the LLC cannot pay its debts, creditors can only access assets owned by the LLC. The personal assets of each LLC member are not readily subject to seizure by creditors.
This protection can also work in reverse. If an LLC member is sued, the creditor cannot pursue the assets the LLC owns. This is called charging order protection. In most states, charging order protection is enjoyed by LLCs with two or more members. Wyoming, Delaware and South Dakota are a few of the notable exceptions, which give charging order protection to single-member LLCs.
6. Limited Partnerships
Limited partnerships (LPs) blend elements of LLCs and general partnerships. In this business structure, multiple owners create a partnership and run the company. They then bring on limited partners, who are passive investors. This structure is particularly advantageous for those who wish to have investments protected, as the company itself can make investments in various stocks and commodities using limited partner funds. Much like an LLC, if the LP is sued, that liability will not make its way back to the limited partner. Likewise LP assets enjoy charging order protection when someone sues a limited partner.
The downside is that the general partner who controls the LP is vulnerable to lawsuits against the business. This disadvantage is one of the major reasons that there are very few LPs formed today.
7. Annuities
Annuities are insurance contracts that provide income streams, usually for retirement. They are exempt from federal bankruptcy law. Despite this, we rarely use them as a tool to protect assets because of their poor financial returns and inability to access principal amounts. If you’re looking for an asset protection tool, we recommend corporate structures, LLCs, and trusts rather than annuities.
8. Corporations
A corporation is a great tool for protecting personal assets from business liablities. It works as a limited liability tool for its shareholders, directors, and officers. That means it will protect your assets from collectors of corporate debts and shield you from lawsuits against the company.
However, while they’re useful for many people, a corporation cannot provide professional liability protection for medical doctors, dentists, financial consultants, and accountants. It can, however, offer a shield from non-professional employee liability.
Finally, for a corporation to truly provide asset protection, it must be a distinct entity from its members. If you mix your personal accounts with corporate accounts, the corporation will be seen as an extension of your assets and can be attacked by a creditor.
9. Equity Stripping
Equity stripping is a natural progression from the privacy provided by land trusts. While land trusts obscure your ownership of a piece of real estate, equity stripping goes further by removing the visible wealth—the equity—from the property itself.. While that might sound aggressive at first, it’s a powerful way to lawsuit-proof real estate holdings. Why? Because real estate is always vulnerable to local court rulings—it’s tied to the jurisdiction in which it physically sits.
The process of equity stripping works like this: We attach liens to the property to reduce the amount of equity. For example, if you own investment properties, you can take out a second mortgage or a HELOC that reduces the amount of equity in the property. Once that equity is removed, you can continue using the property as if you own it, but it will be protected if you lose a lawsuit.
For more advanced protection, we often recommend setting up your own privately held LLC to record mortgages or deeds of trust on your properties. If a lawsuit arises, an international lender—working in tandem with your offshore trust—can purchase those loans. The loan proceeds go into your offshore trust, safe from U.S. court orders. Better yet, those funds can be invested offshore—potentially earning more than you’re paying in mortgage interest—allowing you to protect your wealth and grow it at the same time.
10. Liability Insurance
Liability insurance helps cover the cost of lawsuits against you or your company. Most people, regardless of their net worth, have liability insurance in some capacity. For example, almost every state requires drivers to carry liability insurance for bodily injury and property damage.
It’s worth noting that liability insurance is not an asset protection strategy when used alone. Many lawsuits, particularly those filed against wealthy individuals, will exceed the coverage level of any insurance policy. For true wealth protection, you must use a liability insurance policy in tandem with stronger tools, like offshore trusts. Doing so allows the liability insurance to provide coverage when necessary, while the offshore trust protects the majority of your wealth.
Discover the Right Legal Tools with Asset Protection Planners
Asset protection plays a key role in protecting your wealth and privacy, and is also crucial to estate planning. It’s important that whatever tools you use are structured correctly.
While it’s nice to know about the tools used to protect assets, using these tools correctly requires an expert touch.
Fortunately, Asset Protection Planners is here to provide the assistance you need. Fill out the form at the bottom of this page to schedule a free consultation, and we’ll start building your asset protection strategy.
