What is Asset Protection? Asset protection planning is a method of managing legal risks. It is not meant to replace the need for insurance, nor intended to illegally avoid paying debts. Asset protection techniques are intended to serve as the last line of defense when everything else has gone wrong.
A well designed wealth preservation plan will shield your assets from creditors. One well-known fact of litigation strategy is to sue parties that have "deep pockets." And not just deep pockets, but deep pockets that can be raided easily, without having to go through extra hurdles. One principle of asset protection is to place the assets you own out of reach. This can be done by putting legal title to assets in the name of another entity (like a partnership or trust), and by moving the ownership of assets to jurisdictions that have laws that are much less favorable to creditos than U.S. laws. In addition to the obvious psychological advantage that a sophisticated arrangement gives you, many countries require a U.S. judgment creditor to start the litigation process over again from the beginning in that country's court system. This will force a potential claimant to expend energy, time and money learning the laws of a foreign jurisdiction and re-litigating the case in foreign courts. Suddenly, an apparent "deep pocket" looks more like an armored truck. In short, every lawful obstacle you can raise against a hostile litigant will reduce the chances that you will be sued in the first place.
Objectives: 1. Discourage frivolous lawsuits - less desirable target for lawyers.
2. Encourage favorable lawsuits.
3. Create more options if sued.
4. Insulate personal and business assets from judgments.
5. Provide peace of mind.
6. Ensure privacy and confidentiality.
Strategy:
It is important to integrate asset protection techniques into your financial and estate plan. Asset protection should be always combined with other objectives. It is very difficult, if not impossible, to assist you with creditor protection after a judgment is pending against you. Therefore, be proactive and act now.
Techniques: FAMILY LIMITED PARTNERSHIPS: A family limited partnership ("FLP") is a partnership in which you and your spouse become managing partners of your family's assets. The FLP owns your assets, and you and your spouse own interests in the FLP. Placing your assets in a FLP will severely restrict a creditor's ability to reach your assets because once a creditor has a judgment against you, the only claim it has to your partnership interest is a charging order. A charging order is a special remedy provided by state law that limits the creditor's rights in the partnership interest to the distributions of the partnership. The partnership interest itself remains in your hands, and all of the assets in the partnership remain under your control and supervision. What's more, a creditor who holds a charging order against your interest in an FLP will be taxed on your share of income from the assets in the FLP. This is true even if the partnership makes no distributions to the creditor.
Learn More ASSET PROTECTION TRUSTS: A foreign situs asset protection trust ("APT") is administered according to the laws of a carefully selected foreign jurisdiction. The purpose is to another shield to your wealth preservation plan. The laws of the foreign jurisdiction will make it much more difficult for a creditor to lay claim to your assets.
Learn More FLP AND APT COMBINED: The APT is best used in conjunction with a family limited partnership because your assets never have to leave the U.S. in order for the trust to provide protection
. Learn More Q-TIP TRUSTS, BYPASS TRUSTS & TRUSTS FOR CHILDREN: Your estate plan can be drafted to include several techniques that protect assets from the creditors of you and your children. For example, your will or revocable trust may provide that your one-half of your combined assets be held in trusts for your surviving spouse during his or her lifetime. The available unified credit amount ($1.5 million in 2004) would typically be allocated to a bypass trust and the balance to a Q-Tip trust. The assets in these trusts are protected from your spouse's creditors during her lifetime. At your spouse's death, you may have your children's inheritance held in irrevocable trusts for their benefit. The inheritance is not subject to the child's creditors, or to a child's ex-spouse upon divorce, and may also qualify to avoid estate tax at the child's death.
IRREVOCABLE LIFE INSURANCE TRUSTS: You may benefit from added creditor protection by obtaining life insurance through an irrevocable life insurance trust. The main objective of the trust is to keep the life insurance proceeds from being subject to estate tax in either of your estates and having the proceeds available to pay estate taxes at the survivor's death. The trusts also shield the life insurance policies and proceeds from creditors. Creditors should not be able to reach the life insurance policies owned by the trust. If there is a transfer of money to the trust to pay insurance premiums close to the time a fixed creditor's claim arises, the creditor might be able to recover an asset from the trust equal to the amount of such premium, but not the whole policy. Also we have an argument that the creditor should not be able to reach even that amount. If an insured dies, the life insurance proceeds in the trust should thereafter be secure from any creditor claims of the survivor.
QUALIFIED PLANS: Your qualified retirement assets are typically not subject to creditor claims. This is consistent with government's policy to encourage saving for your own retirement support. Business owners should certainly seek qualified counsel to determine the best methods for sheltering profits in qualified plans.
Summary: Given the unfortunate state of the American legal system - and, some would say, the American society that is exploiting it - it is more important than ever before to consider how to protect your wealth against the rapidly growing threat of being named in a lawsuit. Whether a claim against you has merit or not, the simple fact of being named in a lawsuit will cost you time, money and energy. Like it or not, anybody can be sued for any reason in the United States. Yes, a groundless claim can be thrown out of court, but not without a fight. By taking the proper precautions before a potential claimant puts your name on the papers starting a lawsuit, you can avoid not only the threat of losing your assets to a creditor, but also the threat of being sued in the first place.