Asset protection planning may include establishing a series of trusts, offshore entities, or partnerships to hold legal title to your assets. Creditors will recognize that it is difficult or impossible to seize your assets after a judgment. A proper asset protection plan can cause the creditors to settle for a small percentage or not even pursue you at all. You can employ a series of legal techniques to deter a lawsuit and creditors.
Three Planning Methods: Divestiture, Exemption, and Shielding
The planning can work in three different ways. The first is divestiture, where an individual transfers assets to another person by liens or through outright transfer. This method of asset protection relies upon the fact that a creditor cannot claim what a debtor may possess while another party holds title.
The second method is by exemption planning, where assets are transferred to statutorily protected assets such as life insurance, an IRA, or residential homestead. This method varies from state to state.
The third method is shielding your assets through the use of liability–protecting entities such as companies and corporations.
There are different themes which are applied in shielding property:
Proper planning can provide absolute shielding from creditors and other claimants. The preparation can shield a person’s wealth from creditors and other claimants, but some property of the person will be exposed. The planning of property shielding can be made useful through layering other legal protections on the same wealth. The main goal of shielding is to frustrate all the creditors and their lawyers through changing the economic analysis of a lawsuit.
An Example of Asset Protection Planning
A reputable plastic surgeon in the United States was caught in some breast implant lawsuits that were actually the manufacturer’s fault. However, the manufacturer filed bankruptcy, so the plaintiff’s lawyers targeted the doctor. The doctor, through professionals, had already established a Luxembourg trust. He later filed bankruptcy and his assets were secure.
A good asset protection plan provides asset control while minimizing the risk of loss in the event of an adverse judgment. For instance, if you own several rental properties—as well as residential property—and you are worried about litigation, you can establish a land trust (a simple corporation) for each property. You can also establish limited liability companies to own the land trusts. Another company can also be established to place second mortgages against each property. In the event of a lawsuit for a tenant’s injury involving one of your properties, you would be protected.
According to the U.S. Census Bureau in 2009, nearly 258,000 civil lawsuits are filed every year. Most of them target middle and upper class Americans who have a net worth of less than one million dollars. An asset protection plan is not only important for the rich, but it is also important for middle- and upper-middle class citizens.