What is Asset Protection?

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Asset protection is using a variety of personal and professional financial planning strategies to safeguard an estate.

Asset protection is a pillar of financial planning designed to guard personal assets against creditor claims. It is a set of techniques that help individual entities and businesses curtail or halt a creditor’s attempt to obtain certain valuable assets while operating within the bounds of debtor-creditor law.

How Does Asset Protection Work?

Under statutes and common law, courts recognize the authority to control one’s own assets. While there are no federal statutes that govern how asset protection works, there are a multitude of state statutes that detail specific aspects of asset protection. Many elements of asset protection are enshrined in common law concepts and practices.

It is important to consider asset protection strategies because these strategies offer a layer of cushioning in a legal manner without engaging in potentially illegal practices of tax evasion, contempt, bankruptcy fraud, fraudulent transfer, or concealment (hiding assets). Furthermore, survivors, especially surviving spouses and children, can have judgments made against them or are otherwise vulnerable to lawsuits if assets are unprotected.The most effective asset protection strategies commence before any liability or claim is made since, by that point, it would be too late to consider asset protection strategies.

Asset Protection Strategies

Many financial tools, such as revocable trusts, already exist for the purposes of estate planning and avoiding probate – the legal process required to transfer ownership of assets from a decedent to a living beneficiary. But in terms of protecting assets from creditors, they may be insufficient.

The most common methods for asset protection include asset protection trusts (APTs) and family limited partnerships (FLPs).

APTs are trusts that can hold assets and provide the strongest protections from creditors, lawsuits, or any judgments against an estate. Because of this, it can offer considerable deterrence against potentially costly litigation or influence the outcomes of settlement negotiations favorably.

FLPs are arrangements in which family members pool money to run a business project, where each family member buys units or shares of the business and can profit in proportion to the number of shares they own. But in the context of asset protection, they can pass wealth down to generations while securing tax protections and protections against creditors.

Irrevocable trusts – whereby a person holds property as its nominal owner for the good of one or more beneficiaries – are arrangements that cannot be amended, modified, or revoked once created. These trusts are good because they avoid the process of probate and cannot be changed without the consent of all the beneficiaries or the approval of a court specializing in wills, trusts, and future interests.

Unlike wills, which can be on public record and must be filed with the court to open probate, irrevocable trusts can remain private and be protected from taxes and lawsuits.If a debtor has few assets, bankruptcy can be a favorable route compared to an established plan for asset protection because it can be simpler to do. However, if significant assets are involved, a proactive asset protection plan is preferable and causes fewer problems in the long run.

Retirement plans are exempt from creditors under US federal bankruptcy and the Employee Retirement Income Security Act of 1974. And many states allow exemptions for specified amounts of home equity in primary residences and other personal property, such as cars, clothing, and equipment.

Gifting assets to heirs – if heirs exist – protects assets from creditors in a simple, straightforward, and effective manner.

Depending on what state the decedent lived in, there may be a four to five year wait to get past the lookback period, within which time a creditor can convince a judge to order a claw-back order to get the assets from the heir for the purposes of paying a debt. Also, there is the risk that the heir may be irresponsible with the assets – especially if those assets are money – because that gift is theirs.

Some professions such as financial advice, real estate, law, medicine, or any field prone to many lawsuits for malpractice generate more exposure to liability than others. So, to keep errors and omissions coverage paid up, these professionals invest in insurance to protect various assets from being damaged or otherwise reduced in value.

There are myriad means to cover personal assets from being seized by creditors. Each case of asset protection is different and predicated on a variety of variables, and the field of finance and legal planning coincides with state laws to a significant degree.

It is important to note and remember that life insurance policies are left to the beneficiaries named on the policy. The same applies to any money held in a retirement account, such as an IRA or a 401(k), where the decedent named a beneficiary. Any joint financial accounts or real estate held in joint tenancy become the sole property of the other person named on the account or deed. This includes any investments, real estate, or vehicles held for transfer-on-death (TOD) are not passed by will.

Asset Protection After Death

The fate of an estate’s remaining assets falls mostly on whatever path the decedent chose in life to ensure the ownership of their assets. This is at the heart of estate planning – a process that covers the transfer of property at death or a variety of other personal matters that can involve the counsel of professional advisors familiar with a person’s goals, assets, how they are owned, and family structure. Wills are traditionally associated with estate planning, but trusts are an increasingly common instrument used to distribute the decedent’s assets to their beneficiaries.

Without a will or trust indicating what to do with a decedent’s property, several things may happen. Intestate succession laws can have a say in dividing the decedent’s property among their living relatives, or the court can appoint a representative to determine the decedent’s prior wishes as to future ownership. Both of these options are far from ideal because those assets will be vulnerable to creditors.

Summary

Asset protection is only relevant after a death if the decedent had asset protection strategies in place for their survivors. Survivors benefit from these protections only if the decedent used them in life.

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Kubloss, Inc. (dba EstateGrid) has placed the information on this website as a service to the general public. It is not intended as legal, financial, or health advice or as a substitute for the particularized advice of a qualified professional. It is provided as is without warranty of any kind, either express or implied, including but not limited to, the implied warranties of merchantability, fitness for a particular purpose, or non‐infringement.