What is Asset Protection Planning…And Who Needs It?

Asset protection planning has proved especially valuable for those who are in professions in which they are likely to be sued. These include health care professionals, physicians, dentists, lawyers, accountants, and sometimes those involved with business enterprises that pertain to health care, such as skilled nursing facilities and assisted living facilities. Entrepreneurs and those in construction (builders, developers, architects) may also be concerned about protecting their assets from lawsuits.

But it is important to realize that all of us are exposed to potential lawsuits that can result from car accidents, accidents in the home, and our children’s behavior. Most of us know someone who had a problem and lost everything. Asset protection planning is also important to prevent the loss of family assets due to divorce.

Asset protection planning is not about hiding assets. It is about using existing laws appropriately to obtain the best possible protection for assets. The best time to plan is before a claim arises, as it is highly important to avoid fraudulent transfers. But even with an existing claim, some planning options may still be available.

Asset protection planning can potentially save money by reducing the need for large amounts of insurance, and eliminating your insurance “deep pockets” can go a long way toward discouraging lawsuits.

Strategies In Asset Protection Planning

Malpractice insurance is always the first line of defense for professionals. For the rest of us, having personal liability insurance (an umbrella policy) is a good first step. Then, depending on your situation, your attorney may recommend a combination of strategies. Here is a brief introduction to some of them, going from simplest to most advanced.

Use exemptions. Certain assets are automatically protected by state and federal exemptions. State exemptions will vary, but may include personal property, life insurance, annuities, IRAs, homestead, and forms of joint ownership. Federal exemptions include ERISA, which covers 401(k)s, pension, and profit sharing plans.

Convert a non-exempt asset to an exempt asset. For example, if your state has a large homestead exemption, you could use cash (a non-exempt asset) to pay down your mortgage and increase the equity in your home. Another possibility is moving an IRA that is not well-protected under state law into an ERISA-qualified retirement plan that is protected under federal law.

Convert some jointly owned property into separate property for the spouse not at risk. However, once transferred, it stays separate property. Depending on the length and strength of your marriage, this could be riskier than a potential lawsuit.

Form a professional limited liability company (PLLC) or leasing LLC. LLCs can be created to own specialized or valuable equipment and/or real estate to remove these assets from a professional practice. “Lease back” agreements can then be created between the professional practice and the leasing LLCs. A family limited partnership or a family LLC can also own non-practice assets like personal use real estate, investment accounts, cash or bank accounts, and investment real estate.

Create a domestic asset protection trust. These are U.S. based trusts that, depending on the state in which they are created, can provide extra layers of protection, especially if LLC interests are transferred to them. Currently, Alaska, Delaware, Nevada, and Wyoming have the most favorable laws.

Create an offshore asset protection trust. These are created under the laws of a foreign country that does not enforce the judgments of other countries. (Bermuda, Bahamas, Isle of Man, Cayman Islands, and the Cook Islands are popular choices.) If you are sued in this country and a judgment is awarded, it has no effect in the country where title of your assets is held (in your foreign trust). The case would have to be retried in the foreign country, but first a local attorney must be hired and the witnesses would have to go there to convince the court to even accept jurisdiction over the case. Be aware, however, that if the U.S. court orders you to repatriate the assets and you refuse, you could be cited for contempt and even jailed! It is absolutely imperative that you use an attorney who is experienced with these trusts to design the offshore structure properly.