Asset Protection Strategies

Asset protection strategies are legal methods used to shield personal and business wealth from lawsuits, creditors, and unforeseen financial risks.  The strongest strategies are available before any claim exits, but the door, albeit more difficult and extra expensive, does not close when a lawsuit is filed.  Some key strategies include utilizing offshore asset protection trusts, forming limited liability companies to separate business liabilities with charging order protection, equity stripping, irrevocable trusts with spendthrift clauses, exemption planning, obtaining insurance and umbrella policies.

OFFSHORE ASSET PROTECTION TRUST

An offshore trust is the strongest form of asset protection available to U.S. residents.  It moves assets to a foreign trustee governed by a country’s laws that are built to block U.S. creditor judgments.  The Cook Islands is the most established jurisdiction.  A U.S. judgment has no legal force there.  A creditor who wants the trust assets must start over, such as hire local attorneys, refile the lawsuit under Cook Islands law, and file a minimum of $100,000 bond with the Cook Islands authorities.  The Cook Islands trust laws have been tested in contested proceedings for over 45 years.

LIMITED LIABILITY COMPANIES AND CHARGING ORDER PROTECTION

A properly structured limited liability company limits a creditor to a charging order, a lien on distributions that does not give the creditor control over the limited liability company, access to its assets, or the ability to force a payout.

EQUITY STRIPPING

Equity stripping is an asset protection strategy that involves reducing a property’s equity to make it less appealing to creditors.  It works by placing liens or loans, such as a second mortgage or home equity line of credit, on an asset, creating high debt and low net value.  The primary goal is to make a property or business appear “judgement proof” meaning it has no equity for a creditor to seize, thereby deterring lawsuits.

IRREVOCABLE TRUSTS WITH SPENDTHRIFT CLAUSES

An irrevocable trust created by one person for the benefit of another provides creditor protection for the beneficiary if the trust includes a spendthrift clause.  A spendthrift clause in a trust prevents a beneficiary from mismanaging their inheritance and protects trust assets from their creditors.  The beneficiary’s creditors generally cannot reach the trust assets before distribution because the beneficiary never owned them and cannot compel a payout.  It restricts the beneficiary from voluntarily transferring, selling or assigning, their future interest and blocks creditors from seizing assets while they remain in the trust.  Spendthrift clauses are common in estate planning, whereby a parent creates a trust for an adult child, protecting those assets from the child’s future creditors, divorce claims, and lawsuits.  Most states enforce these provisions.

EXEMPTION PLANNING

State and federal law automatically shield certain categories of assets from creditors.  The protections are statutory rights, though structuring assets to quality often involves professional guidance.

• • • Homestead exemptions protect equity in a primary residence. The strongest states include Florida and Texas, who have no dollar cap.  Other states limit protection to as little as $5,000.
    • Federal law shields retirement accounts covered by ERISA, including 401(k)s, pensions, and profit sharing plans from creditors. IRA protection depends entirely on state law and ranges from full protection to none.
    • Tenancy by the entirety protects jointly held marital assets from the individual creditors of either spouse in states that recognize it.

INSURANCE AND UMBRELLA POLICIES

Liability insurance is where asset protect starts.  Auto, homeowners, and professional liability coverage handle most routine claims.  An umbrella policy extends coverage beyond the limits of underlying policies, usually in $1,000,000 increments.  Insurance is necessary but limited.  Every policy has a dollar cap, a list of exclusions, and the possibility the carrier denies the claim.  An umbrella policy excludes intentional acts, business disputes, and professional liability.  Eventually insurance runs out or they refuse to pay.

If you need help determining the best asset protection strategies, we can help.  Timing is NOW.  Contact Us Today!

Disclaimer:  This information is made available by Bagla Law Firm, APC for educational purposes only as well as to give you general information and a general understanding of the law, and not to provide specific legal advice. This information should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.