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Asset protection is the use of a variety of legal solutions to make your wealth more difficult to reach in case of a future lawsuit or other legal threat. Asset protection uses trusts, limited liability companies, and other legal entities to put together a plan that helps safeguard your wealth.
While the field of asset protection has been around for decades now, there are still a variety of common misconceptions around this legal field. This article will discuss some of these myths and misconceptions and set the record straight about the reality of the asset protection process.
This is perhaps the most common misconception regarding legal protection. Most people might believe that they cannot afford legal services or that only super-wealthy business owners, real estate moguls, or professional athletes should be concerned about safeguarding their wealth.
The truth is those with more modest levels of wealth can benefit the most from asset protection strategies since they are more at risk of having their entire savings wiped away in litigation. Additionally, you do not need millions of dollars to fund an asset protection trust. Even a Swiss bank account can be opened with a six-figure sum at several prestigious financial institutions. Thanks to our contacts in the international asset protection space, we are able to offer our clients even lower initial account minimums at different banks around the world.
You might have stumbled across articles on the internet that discuss how transferring funds and investments to an offshore trust can help avoid taxes in your home country. While this might be the case for citizens of some other countries, the reality is, if you are a citizen or resident of the Unites States, you are required to report and pay taxes on your worldwide income, regardless of where it was generated.
If you are from the U.S. and you fail to report your foreign assets and income you might be unwittingly committing a crime. Offshore asset protection trusts come with IRS reporting requirements that you should be aware of. Anyone considering an offshore trust should make sure they have access to experienced and sophisticated accounting services to ensure they comply with all the relevant IRS requirements around offshore funds and accounts.
Just like your asset protection plan does not allow you to hide your assets from the IRS, if you maintain a beneficial interest in your trust you might have to disclose this if requested by a U.S. court or judge. Lying or intentionally failing to disclose your asset protection plan can mean facing charges for contempt of court. Claiming that you lost your cryptocurrency in a “boating accident” can lead to similar penalties. The penalties associated with this can be serious and include incarceration.
A good asset protection attorney does not rely on deceptions or misrepresentations. Even if your asset protection structure is disclosed, it does not mean it fails to be effective. Perhaps unsurprisingly, when the opposing party lawyers learn of the existence of an asset protection trust, they might be less enthusiastic about their lawsuit since it probably means a lot more work for them and lower probabilities of success.
Revocable Living Trusts are very popular due to their relatively low cost, ease of management, and ability to help transfer wealth to the next generation without the costs and hassles of probate proceedings. If you already have a revocable trust in place, your estate planning attorney might have briefly discussed some asset protection benefits. Alternatively, if you are the type to review legal documents closely, you might have seen spendthrift clauses in your trusts. Unfortunately, this is another very popular misconception.
The truth is, while revocable living trusts can provide some degree of asset protection for your children or other beneficiaries, they do absolutely nothing to protect the settlor against legal claims. Importantly, any asset protection in a revocable trust does not begin until the settlor passes away and the trust becomes irrevocable. If you were relying on your own revocable trust to protect your wealth, know that such protections are completely disregarded during your lifetime in case of lawsuit or other legal issue.
Asset protection planning often involves working with financial planners and investment professionals, however, these two processes are completely different. Asset protection attorneys can analyze your legal situation and help create the legal structures used to help safeguard your wealth. Once the funds have been transferred to an asset protection plan, financial planning and investments will generally still be needed. While our legal team can help put you in contact with financial professionals, attorneys do not provide these types of services as part of the asset protection process.
Similar to the past point, legal and accounting services are separate businesses. Asset protection attorneys can work together with certified public accountants to help explain the legal structures involved in a plan. Depending on the complexity of your asset protection plan, collaboration between attorneys and accountants might be needed to make sure the first year’s taxes are well taken care of. However, just like accountants are not allowed to practice law, asset protection attorneys cannot prepare and file tax returns and other IRS requirements on your behalf or on behalf of your trust.
While insurance policies are necessary in a variety of contexts such as automotive, homeowners, professional, etc., they are generally considered only a first line of defense. Depending on your level of wealth, insurance alone might not be enough to fully protect yourself. Insurance policies contain exclusions and policy limits that may leave you at risk from a variety of potential legal claims. If a claim amount goes over the policy limit, or if the insurer determines the claim falls under one of the exclusions set out on the policy, then your assets are at risk.
If you want to make gifts to your spouse, children, or others, that is perfectly fine as long as you do it out of generosity and well before facing any legal threats. For anyone facing a lawsuit, they might think it’s the perfect time to gift everything they own. After all, they can’t take anything away if you don’t own it, right? Wrong. The truth is gifting assets away right before defending a lawsuit is almost never a good idea. These are called “voidable transfers” which means the gifts can be disregarded by a court and clawed back. So, you might actually want to hold off on making any large gifts until after the legal issue is resolved.
Loss prevention, also called “retail asset protection” are steps businesses take to prevent profit losses from theft, fraud, and human error. It almost goes without saying, but the legal field of asset protection has little to do with retail loss prevention. This is just an unfortunate confusion caused by the similarity in the names. Asset protection is concerned with protecting individuals’ and families’ wealth from future legal claims, while loss prevention protects stores and other businesses from shoplifters, thieves, and fraudsters.
Hopefully, this article has helped clarify some of the most common misconceptions so you can have a much better idea about the reality of what asset protection is and is not. If you have more questions about asset protection strategies and what might be best for you, contact our experienced team at Blake Harris Law to create your asset protection plan. Call us today at 786-559-1209, email us at Info@BlakeHarrisLaw, or fill out our contact us form.