Asset Protection

Given our litigious society, wealthy individuals, especially those in professions or owning investments with liability exposure, should anticipate the likelihood of creditor issues. Too many things can happen to ignore this unfortunate fact of life. Planning for asset protection starts immediately – before any creditors or claims appear on the horizon.

In the majority of cases, there isn’t any absolute protection against a determined creditor with the means to do whatever is necessary to collect. But that’s not the point. Most creditors are pragmatic and will constantly weigh the cost of collection against their expected return. They may not say that, but that’s what they are thinking.

Asset protection is really about building barriers that will facilitate negotiations for the best deal possible. A negotiated settlement of fifty cents on the dollar may be a major victory for the debtor. With significant barriers, the results are often much better than that. Sometimes the creditor will simply walk away from the debt. However, one must keep in mind, if a debtor does nothing, the creditor will have a clear shot at all the debtor’s property to satisfy the judgment. A little early planning can go a long way.

Barriers, in the sense of asset protection, typically involve transfer of the owner’s assets to a trust, entity, another individual, etc. It may also involve moving the assets to another jurisdiction with more favorable or debtor friendly laws. Or it may simply involve purchasing proper insurance to cover certain risks. Good asset protection invariably involves reliable people who will play key roles (trustee, trust protector, power holder, etc.) in the protection scheme. Needless to say, these key operators MUST be loyal and trustworthy. And there is always that other factor which is difficult to predict – luck.

The law governing asset protection is state specific, so choice of law, location of the assets, residence of the parties, and jurisdiction of the dispute are critically important. And many aspects of asset protection law, especially involving Domestic Asset Protection Trusts, haven’t been tested in the appellate courts. So litigating complex issues without the support of clear statutory and/or case law may ultimately be left to the caprice of a judge – who may or may not be competent addressing the issues at hand.

The tools typically used for asset protection include:

  • acting early, before a creditor is a problem, to avoid any issue with a fraudulent conveyance;
  • adequate liability insurance;
  • use of business entities (e.g., partnerships or limited liability companies);
  • use irrevocable trusts for advanced estate planning (e.g., ILIT, QPRTs…);
  • utilize an Asset Protection Trust in a more friendly state (e.g., Nevada, South Dakota);
  • use Power of Appointment Trust in any jurisdiction;
    create and fund selected assets in an off-shore trust (e.g., Cook Islands); or
  • a combination of several of these tools in a stacked infrastructure.

When looking at asset protection, how does one measure success? As mentioned above, the effectiveness of asset protection planning will only be known once a creditor has a claim and is knocking at the door.

Therefore we measure the success of an asset protection structure where it provide one or more of the following:

  • deter litigation – usually by making the target less attractive
    provide incentive for a quick and advantageous settlement for the debtor;
  • level the playing field – providing numerous issues with which some future adversary will have to contend;
  • enhance one’s bargaining position – may even allow the debtor to play hardball with the creditor;
  • provide options as the game is played – giving the debtor alternative courses of action that would not otherwise exist.

The real measure of success is how much better off one is because they engaged in asset protection planning as opposed to doing nothing. With adequate estate planning, the end result almost always results in a creditor seeing the barriers to collection, measuring the risks and cost of proceeding, and ending up negotiating a settlement – usually for a discounted amount or on terms favorable to the debtor. Of course, there is a price to pay. Asset protection schemes can be expensive to implement where the cost is often incurred years before the creditor crisis arises. Accordingly, there is the time value of money to consider. But people with significant wealth are often looking at the long haul and should be willing to engage in prudent asset protection as “insurance” against the myriad of risks in this crazy, unpredictable and litigious world we live in. And they do it to provide a legacy for their loved ones. But again, the central message is – don’t procrastinate. Act now while you still have viable options.