The objective of asset protection is to protect assets from general creditors, other than creditors of the entity holding the asset. Generally, the ownership of an asset is placed into a legal entity, such as a corporation, limited liability company, or trust. The owners of the entity will not be responsible for the liabilities of the entity and vice-versa (except in very limited cases of fraud or concealment). In asset protection transactions, the ownership may also be confidential. Prenuptial agreements are another form of asset protection which must be entered into prior to a new marriage.
Asset Protection Planning
An asset protection attorney can help you legally and ethically shield your assets through many methods, including the following:
- Prenuptial Agreements
- Corporate Formation
- Limited Liability Company Formation
- Professional Limited Liability Company Formation
- Series Limited Liability Company Formation
What is Asset Protection?
Asset protection, also called the debtor-creditor law, is a group of related legal methods and the relevant laws that deal with protection of the assets of people and companies from civil suits.
The ultimate objective of asset protection is to keep assets from creditors legally, without concealing them illegally or evading taxes (in cases of claims from the IRS).
How Does Asset Protection Work?
One thing to keep in mind is that asset protection is not the same as the limitation of liability. Liability limitation stops civil suits from being filed in the first place. Asset protection is to keep judgments from taking assets after these suits have been filed. Even so, be aware that these two areas of legal practice do intersect at times.
Which Assets Can Be Protected?
Unfortunately, relatively few assets are automatically legally shielded from creditors. Examples of assets which may be automatically shielded from creditors are home equity (subject to limits in bankruptcy) under homestead laws, retirement plans, and certain insurance policies. Examples of assets which are not automatically shielded from creditors, which need to be protected by asset protection, include:
- Excess Equity in Home
- Investments in Stock
- Investments in Coin
- Investment Properties
- Business assets
- Personal property such as cars, collectibles, furniture
Through the use of special trusts, the legal title to the asset is transferred to the trust, which means that business and individual’s creditors cannot access the assets.
Legal Title and Asset Protection
You might be wondering how it is possible to control assets that you don’t have the legal title to. These legal titles can be assigned to trusts, agents, and nominees.
The trust documents will provide specific instructions for management of the assets in the trust. Often the Trust will hold the business stock or membership interest and appoint the controlling person (Settlor/Trustor) as the manager so that they still make day-to-day operating decisions.
How Are Asset Protection Situations Analyzed?
There are four main factors that attorneys take into consideration when looking at an asset protection situation:
- Whether the debtor is an entity or an individual and, if the debtor is an individual, whether they have a spouse that may also be liable.
- The second factor commonly taken into consideration is the nature of potential liability. This area can be complicated and involves multiple issues, such as the type of business operation and risk of lawsuits, appropriate levels of insurance to cover liability and strong contractual provisions to shift liability or limit liability.
- The third factor is the identity of the creditor. Government agencies, especially the IRS, are treated differently than other creditors.
- The final factor is the nature of the assets themselves and to what extent the assets are exempt from claims of the creditors.