Asset Protection is for Everyone

When you mention asset protection the thoughts of some people go immediately to secret offshore trusts, hiding assets, or tax evasion. But true asset protection is not about hiding assets or evading taxes. Assets can always be found by a determined creditor, and asset protection isn’t about taxes at all – it’s about protecting that nest egg (that you worked so hard to accumulate) from the vagaries of life. It’s also about guarding your assets from the attacks of those who use the legal system like the lottery, hoping to win big from someone with deep pockets. They are sometimes referred to as predators.

If you are not wealthy, then asset protection is probably even more important. You want to hang on to the little that you’ve been able to save. Liability can come from a hundred different directions: a slip and fall on your front steps; an auto accident; something that one of your minor children or employees did; the breach of a contract; and much more. The primary purpose of asset protection is to manage your affairs in such a way that creditors and predators don’t see you as an attractive target.

One way to manage your affairs in that way is to become less of an owner and more of a controller. Creditors and predators can only pursue assets that you own, so if you can take your name off the title, but still control an asset (by using a business entity or trust, for example) that asset is now protected from your personal creditors.

Another way to stop creditors and predators is by your choice of primary residence. There are a number of states that offer great protection for your home, and other states that protect other assets by state statute.

Insurance

The most common asset protection tool is liability insurance. Your homeowner’s and auto insurance policies are examples of liability insurance. If someone is injured on your property or by your car, the creditor will usually deal directly with the insurance company and be paid according to the policy. An umbrella policy provides a backup to standard liability policies. If your liability in a car accident exceeds your auto insurance coverage, the difference will typically be paid by the umbrella policy – which often has limits of a million dollars or more. If your other assets are also protected by some of the other methods discussed in this article, a creditor will usually be willing to settle for the insurance proceeds.

Life Insurance, Annuities, and Retirement Plans

In some states, a creditor cannot take the cash value in a life insurance policy. Likewise, in some states the proceeds of a fixed annuity cannot be reached by the annuitant’s or the beneficiary’s creditors.
Retirement plans such as profit sharing plans, money purchase plans, 401(k) plans, 403(b) plans to which employers make contributions, and defined benefit plans are protected by ERISA anti-alienation rules. Usually both the owner and beneficiary spouse are protected.

The Use of Trusts

You are able to provide asset protection for the benefit of another person through proper trust planning. For example, you could establish a “spendthrift” trust for your children or grandchildren which gives total discretion over all distributions to a Trustee, and which prohibits them from selling or transferring their rights to the trust assets. In that circumstance, the creditor of a child or grandchild cannot compel the Trustee to make distributions.

A domestic Asset Protection Trust is a trust that is formed in one of the states that allow you to establish a trust for yourself which will protect you from creditors. Foreign Asset Protection Trusts (also known as “offshore trusts”) protect assets by providing many barriers to collection, thus making your assets less attractive to creditors and predators. The use of any Asset Protection Trust, whether domestic or foreign, should only be done under the advice and supervision of an estate planning attorney with experience in that area of law.

Whatever asset protection strategy you choose, it is important that it be implemented before any incident occurs that causes liability. You can’t insure your boat after it has begun sinking – that has to be taken care of before you take it out for a cruise. The same thing is true of asset protection. You can’t protect yourself from current creditors, and to try to do so is called a fraudulent transfer and will be reversed by a judge. You also can’t protect yourself from those who are likely to become creditors because of something you already did. For example, if you’re a physician who just amputated the wrong leg on a patient, you can’t go out and transfer assets while that patient is in the recovery room, trying to beat the malpractice lawsuit which is sure to follow.