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The Basics of Asset Protection
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Introduction |
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The “asset protection” concept has spawned a new sub-specialty within
the estate planning community. Asset protection involves the creation of one
or more entities to prevent, limit or hinder a creditor's attempt to seize and
sell a debtor's assets in satisfaction of a debt.
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How Asset Protection Works
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Asset protection
works by changing the character of a debtor's assets, making
it difficult, if not impossible, for a creditor to seize and sell them. By
transferring assets into certain types of trusts or limited liability entities
(corporations,
limited partnerships and limited liability companies) a future creditor is
restricted to only the debtor's right to distributions from the entity
(which can be restricted),
but has no access to the assets themselves. There are two general types of
asset protection:
(1) Using off-shore
jurisdictions to place assets outside the reach of creditors and the
U.S. court system; and
(2) Using entities formed within one of the states with favorable debtor protection
laws. Usually, these jurisdictions permit the creation of barriers to a judgment
against the debtor.
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Domestic Asset Protection
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Domestic asset protection, where the entity formed is located in the U.S. and
the transfer of assets is not intended to defraud a known or potential creditor,
provides a potential debtor with a solid layer of protection. When a debtor
is challenged in court, the debtor has firm statutory and case law supporting
the structure and the inquiry inevitably becomes whether there was a fraudulent
transfer of assets.
Note: Asset protection does not work when there is an existing creditor
or if a claim arises within a period of years (usually between 2
to 4 years, depending on state law) after the asset protection structure
is placed into service. Too often, clients requesting asset protection
run afoul of applicable state fraudulent transfer laws. Form your
asset protection entity as soon as possible, do not wait until a
lawsuit is threatened or pending.
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Off-Shore Asset Protection
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In contrast
to domestic asset protection concepts which are grounded in U.S. law, offshore
asset protection schemes are usually an expensive and worthless deception.
Attorneys, bankers and foreign countries enrich themselves by convincing
naive, paranoid, and often nefarious citizens to spend thousands of dollars
creating trusts and companies in foreign jurisdictions which have favorable
debtor laws.
There is a "sleaze" factor involved with offshore asset protection
- the attempt to hide one's assets offshore -- that is absent from domestic
asset protection. Also, with offshore asset protection, the debtor is challenging
the jurisdiction of the U.S. court system, a dangerous argument to make
before a judge with the power to toss you in jail for contempt.
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Additional Information
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For additional
information on domestic asset protection and asset protection techniques
in general, see the Tax Prophet's Tax Class on Asset
Protection.
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