Asset Protection is a concept that has spawned a new
sub-specialty within the estate planning community. Asset Protection involves the creation
of one or more legal entities to prevent, limit or hinder a creditor's attempt to seize
and sell a debtor's assets in satisfaction of a debt owed to the creditor. Usually, the
creditor is seeking payment arising from an award of damages obtained in a lawsuit, but a
properly constructed asset protection plan will protect against most creditor's claims,
regardless of origin.
Often, entities are formed in off-shore jurisdictions which have laws favorable to
debtors. Invariably, these plans are dismissed by U.S. courts as shams and offer the
debtor no real legal protection.
How Asset Protection Works
(including U. S. asset protection) changes the character of assets held by the debtor from
those that can be easily seized and sold, to an asset that the creditor cannot legally
seize and sell. By transferring assets into certain types of trusts or limited liability
entities (corporations, limited partnerships and limited liability companies) in which the
debtor owns a portion of the interest in the entity but not the asset, such as a
beneficiary of a trust, stock, partnership interest or membership interest in an LLC, the
creditor is restricted to only the debtor's interest in the entity.
U. S. Asset
In contrast to the off-shore asset protection schemes that have failed each
and every time they have been challenged in court, U. S. asset protection does not attempt
to hide assets or interfere with a creditor's right to enforce a judgment. Instead, U. S.
asset protection uses the laws of a favorable jurisdiction (such as Delaware or Nevada) to
limit the creditor's rights such such a degree that a prudent creditor would not want to
pursue seizing the asset. Under U. S. asset protection, it is possible to limit the
creditor's right to a "charging order" against a debtor's "economic
interest" in an entity. A charging order carries no right to vote, manage, liquidate
or control the entity or any of the assets held by the entity.
For additional information on U. S. asset protection and asset protection techniques in
general, see the Tax Prophet's Tax Class on Asset Protection.
The Tax Prophet