Asset Protection

What is Asset Protection?

Asset protection  is a set of legal techniques and a body of statutory and common law dealing with protecting assets of individuals and business entities from civil money judgments. The goal of all asset protection planning is to insulate assets from claims of creditors.

Asset protection consists of methods available to protect assets from liabilities arising elsewhere. It should not be confused with limiting liability, which concerns the ability to stop or constrain liability to the asset or activity from which it arises.  Assets that are almost always unreachable are those to which one does not hold legal title. In many cases it is possible to vest legal title to personal assets in a trust, an agent or a nominee, while retaining all the control of the assets. The goal of asset protection is similar to bankruptcy, and the two practice areas go hand-in-hand. When a debtor has none to few assets, the bankruptcy route is preferable. When the debtor has significant assets, asset protection may be the solution. The four threshold factors that are either expressly or implicitly analyzed in each asset protection case are:
  1. The identity of the person engaging in asset protection planning
    1. If the debtor is an individual, does he or she have a spouse, and is the spouse also liable? If the spouse is not liable, is it possible to enter into a transmutation agreement? Are the spouses engaged in activities that are equally likely to result in lawsuits or is one spouse more likely to be sued than the other?
    2. If the debtor is an entity, did an individual guarantee the entity’s debt? How likely is it that the creditor will be able to pierce the corporate veil or otherwise get the assets of the individual owners? Is there a statute that renders the individual personally liable for the obligations of the entity?
  2. The nature of the claim
    1. Are there specific claims or the asset protection is taken as a result of a desire to insulate from lawsuits?
    2. If the claim has been reduced to a judgement, what assets does the judgement encumber?
    3. Is the claim dischargable?
    4. What is the statute of limitations for bringing the claim?
  3. The identity of the creditor
    1.  How aggressive is the creditor?
    2. Is the creditor a government agency? Taxing authority? Some government agencies possess powers of seizure that other government agencies do not.
  4. The nature of the assets
    1.  To what extent are the assets exempt from the claims of the creditors?

All fifty U.S. states also have laws that protect the owners of a corporation, limited partnership, or limited liability company from the liabilities of the entity. Many states limit the remedies of a creditor of a limited partner or a member in an LLC, thereby providing some protection for the assets of the entity from the creditors of a member.

All fifty U.S. states provide some protection for the assets of a trust against the creditors of the beneficiaries. Some states allow asset protection for a self-settled trust (a trust in which the settlor or creator of the trust is included as a potential discretionary beneficiary) and some states do not.Creditors have several tools to overcome the laws that provide asset protection. First, there are federal and state fraudulent transfer laws. Today there are two bodies of fraudulent transfer law: the Bankruptcy Code and state fraudulent transfer statutes. Most states have adopted Uniform Fraudulent Transfer Act which defines what constitutes a fraudulent transfer. The UFTA and the Bankruptcy Code both provide that a transfer made by a debtor is fraudulent as to a creditor if the debtor made the transfer with the “actual intention to hinder, delay or defraud” any creditor of the debtor. There creditors can be divided  into three classes: present, future and future potential creditors. While UFTA applies clearly to present creditors, the distinction between a future creditor and a future potential creditor is not as clear. The UFTA is commonly held to apply only to future creditors and not to future potential creditors (those whose claim arises after the transfer, but there was no foreseeable connection between the creditor and the debtor at the time of the transfer).

There are also laws which allow a creditor to pierce the corporate veil of an entity and go after the owners for the debts of the entity. It may also be possible for a creditor of a member to reach the assets of an entity through a constructive trust claim, or a claim for a reverse piercing of a corporate veil.

The anti-alienation provision of the Employee Retirement Income Security Act of 1974 (ERISA) exempts from claims of creditors the assets of pension, profit-sharing, or 401(k)plans. Two exceptions are carved out for qualified domestic relations orders and claims under the Federal Debt Collection Procedure Act. Because the protection is set forth in a federal statute, it will trump any state fraudulent transfer law. Protection of ERISA is afforded to employees only and does not cover employers. The owner of a business is treated as an employer, even though he may also be the employee of the same business, as in a closely held corporation. Accordingly, ERISA protection does not apply to sole proprietors, to one owner business, whether incorporated or unincorporated, and to partnerships, unless the plan covers employees other than the owners, partners and their spouses.

Asset protection planning requires a working knowledge of federal and state exemption laws, federal and state bankruptcy laws, federal and state tax laws, the comparative laws of many jurisdictions (onshore and offshore), choice of law principles, in addition to the laws of trusts, estates, corporations and business entities. The process of asset protection planning involves assessing the facts, circumstances, and objectives of an individual, evaluating the pros and cons of the various options, designing a structure that is most likely to accomplish all the objectives of the individual (including asset protection objectives), preparing legal documents to carry out the plan, and ensuring that the various legal entities are operated properly in accordance with the laws and the objectives of the individual.

Let’s look at the LLC, IBC and Trust:

LLC

 

IBC
Trust

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Disclaimer: We do not give tax nor legal advice. The following information is offered only as a point of view. You are encouraged to evaluate this information and act according to your own reasoning and conclusions. Because we encourage independent thought and personal responsibility, we do not accept credit nor liability for the use or misuse of this information.