Asset Protection
It’s not what you earn that matters, it’s what you keep. This common wisdom is usually applied to the impact taxes can have on income and investments. Other potential liabilities, however, including lawsuits, divorce settlements and creditor claims, can be just as harmful to personal wealth as taxes, if not more so — particularly given the surge in litigation in recent years. Most people have exposure to these liabilities in one form or another, whether it is the result of a high-risk occupation, a teenage driver in the family, or a family business with commercial property and all its attendant risks. What many people lack, however, is a comprehensive plan for protecting assets before potential claims or financial problems materialize.
Definition of Asset Protection
Asset protection is a process of protecting estate assets against attack by creditors. A well-designed asset protection plan builds a protective fort around the client’s estate and guards family wealth from external creditor attack. Asset protection works best if the asset protection plan contains multiple layers of protection so that even if a creditor can defeat one protective device, there are other impediments to the creditor’s attack which surround the family’s nest egg. Asset protection is, therefore, a fundamental building block of estate planning.
Anyone who is concerned about their contractual liabilities or being named as a defendant in a civil dispute needs an asset protection plan.
Definition of Asset Protection Planning
How can you protect your assets from lawsuits? This is achieved through the process of asset protection planning, which means taking assets that are subject to creditors claims, called nonexempt assets, and re-positioning them as assets that are out of the reach of creditors claims, called exempt assets.
When to Begin Asset Protection Planning
Asset protection planning cannot begin when a judgment creditor is already on the horizon. Why? Because each state has laws that protect a judgment creditor against people who transfer their assets out of their names with the intent to hinder, delay, or defraud a creditor. In these situations, a court will see right through these fraudulent transfers and simply order that the transfers be reversed and the assets turned over to pay the creditor.
Instead, asset protection planning must begin long before there is any sign of a lawsuit. Aside from this, in order to put together a comprehensive asset protection plan, you will need to integrate two important goals:
Your short term and long term financial goals, and
Your estate planning goals.
Asset Protection and Your Financial Goals
In examining your short term and long term financial goals, you will learn about your current and future sources of income, how much money you will need to retire, and how much will be left over to pass on to your heirs through your estate plan after you die. This will then lead you to a detailed financial plan.
Once your financial goals have been examined and your financial plan is in place, you can review your current assets to determine if they are exempt from creditors and, if they are not, then re-position them to become exempt.
A financial plan will also allow you to plan for positioning assets that you intend to acquire in the future to be protected from potential creditors.
Asset Protection and Your Estate Planning Goals
Once you have your financial plan in place, you will know your current net worth and an estimate of how much wealth you can expect to accumulate in the future. From this information you will be able to create a comprehensive estate plan. This plan will address issues such as who will take care of you and your assets if you become mentally incapacitated, who will take care of your minor children if you die unexpectedly, and who will manage your assets and take care of your spouse or other family members after you die. Your estate plan can also encompass asset protection planning through the use of advanced estate planning techniques such as family limited liability companies and irrevocable trusts for you, your spouse, and your children or other beneficiaries.
Financial Planning and Estate Planning Result in Asset Protection
Once you have integrated your financial goals with your estate planning goals and positioned or re-positioned your assets to be protected from creditors, you will have a comprehensive asset protection plan in place. Then, if a creditor holding a judgment against you does show up at your front door, you will be in a better position to negotiate a quick settlement for pennies on the dollar instead of having all of your hard earned money on the table.
Whats the Most Common Asset Protection Mistake?
As I warned above, if you try to start asset protection planning after a lawsuit has been filed against you, or even if before the lawsuit is filed you anticipate it being filed, then you will be exposing any asset protection planning that you attempt to do to attacks and reversal by a judge or jury.
Unfortunately too many people are learning far too late that asset protection planning is also long term planning, not something that can be done as a quick or temporary fix. Thus, the time to put your asset protection plan together is long before a lawsuit is on the horizon.
Conclusion: A Call for Timely Planning
Asset protection is a critical part of a comprehensive wealth and estate plan. As with any element of wealth and estate planning, the time to create an asset protection plan is before it is needed. Strategies to preserve wealth must be in place before that wealth is under attack by a creditor or plaintiff. Furthermore, an asset protection plan is only effective if it reflects an individual’s or family’s current circumstances. The plan must constantly evolve — as new assets are added and others are divested, as new debt is assumed and other obligations settled, or as new business ventures are embarked upon or personal situations change. Finally, due to the myriad risks and the complexity of the solutions involved, seeking the assistance of competent professional wealth advisors is vital.
