Why is Asset Protection necessary?

Why is Asset Protection necessary

It is unfortunate that we live in such a litigious society where a person is never more than one mistake away from having everything that he/she has worked for put at risk in a lawsuit. Alternatively, creditors can try to take away assets for various reasons. Given the volatility of business fortunes, people occasionally make mistakes that potentially threaten their long-term financial future.

When your insurance has policy limits or will not cover claims filed against you, it will be your assets that are at risk in a lawsuit. When someone obtains a judgment against you, it will be your assets that they are able to come after to satisfy the judgment. While some categories of assets are off limits to judgment holders, almost everything else is fair game. This means what you have could become what they have with a few strokes of the pen.

If you work in a profession that is prone to lawsuits, this is even more of a risk for you. For example, if you have a professional practice, your malpractice insurance may only provide so much protection. Similarly, if you are starting a business and have to guarantee your loans, you may also be at risk of losing your assets if things do not work out as you hope.

Asset protection means things do not have to be this way, and you do not need to place yourself at the same degree of risk. Through various proactive steps you can take ahead of time, you can build a proverbial fence around most of your assets to keep them out of the hands of creditors and judgment holders. Once a case goes to court, you have little to no control over the outcome and whether everything you have worked for will be threatened. Asset protection is advisable to give you peace of mind.

What does it mean to protect your assets?

Protecting your assets means taking legal steps to keep them safe from creditors and lawsuits. This can involve changing the ownership structure of your assets or transferring ownership to entities that limit your liability. For example, transferring real estate into a trust or using LLCs to separate personal and business assets.

Effective asset protection planning can provide peace of mind and ensure that your assets remain secure, even if you face legal challenges.

While there are no guarantees in the practice of law, proper planning can give you much greater peace of mind that your assets will remain secure if ever threatened. When done effectively, asset protection greatly limits the amount of assets that judgment holders can get from you. It is important to remember asset protection steps must be taken within the confines of the law and are completely legal so long as they are done properly.

When protecting your assets, your attorney will scrutinize the laws of various states and offshore jurisdictions to form a strategy for where to hold your assets and who should exercise control over them. Asset protection makes as many of your assets as unreachable as possible. Thus, even if you transfer control of your assets to someone else, you still benefit from them, but no one else can without your consent.

What do you want to protect?

After a lifetime of work, you will hopefully have a number of different assets and properties you will want to keep safe from creditors using asset protection. To devise the strongest possible asset protection strategy, it is helpful to know ahead of time exactly what you want to protect. Then, working with an asset protection attorney, you want to figure out which of these assets are already protected by law and which assets you need to take steps to protect.

The good news is that in many states, one of the most important assets of all—your home—may already receive some degree of protection from creditors due to homestead exemptions. Hopefully, you have other assets in your portfolio besides your home. For example, you may have other investments, including stock market investments and cryptocurrency, that do not fall under any exemption.

Since your bank accounts are one of the first things creditors will go after, you need to find a way to move the money from your bank account into another legal instrument. While liquid assets are among the easiest things for creditors to attach, they are also the easiest to protect. Hard assets, such as real estate, are slightly more difficult to access, but they are still not off limits for creditors, so you must find a way to structure the ownership of these hard assets to keep them protected from lawsuits.

You may also want to protect your retirement accounts or the assets you have saved for that stage in your life. Some states have statutory protections for retirement assets, but when it comes to bankruptcy proceedings, there is a limit on the amount of protected assets. Working with an asset protection attorney can help you devise a strategy to give the highest amount of protection to the most assets possible.

How does Asset Protection work?

To establish a successful asset protection plan, the first step is consulting with an experienced asset protection attorney. At Blake Harris Law, we will help you determine the most effective strategy for your situation. Here’s how it typically works:

  • Consultation and Strategy: We begin by understanding your needs and assets, then recommend a tailored plan.
  • Implementing Protection: This may involve transferring assets into trusts, setting up LLCs, and relocating financial assets to protected accounts.
  • Ongoing Monitoring: Asset protection is an ongoing process. We help you adjust your strategy as your financial situation evolves.

Asset Protection Strategies

Effective asset protection is achieved through a combination of strategies, including:

  • Insurance: While insurance is a fundamental component of asset protection, it’s important to recognize its limitations. Insurance policies have caps, and once those limits are exceeded, your assets could be at risk. That’s why it’s important to implement other strategies in addition to insurance.
  • Limited Liability Companies (LLC): An LLC can protect your business assets by limiting personal liability. If your business faces a lawsuit, creditors can only go after the LLC’s assets, not your personal wealth.
  • Trusts: A trust can transfer ownership of assets to a trustee, providing separation between you and your assets. Offshore trusts, in particular, offer enhanced protection, making it extremely difficult for creditors to access assets held in foreign jurisdictions.
  • Moving Assets to Protected Accounts: Certain financial assets, such as retirement accounts or life insurance policies, may enjoy statutory protections from creditors. By placing assets in these accounts, you add another layer of defense against lawsuits.

Can a Trust protect assets from a lawsuit?

A trust is a legal instrument, so naturally the answer to this question is it depends. When structured the right way and in the proper time frame, a trust should provide you with asset protection from lawsuits and creditors. Importantly, the trust must be designed in such a way that there is separation between you and the assets. In most cases, this means you need to transfer some degree of control over the assets to a trustee even while you maintain beneficial ownership. If you retain direct power to control your assets, the courts will likely find your trust instrument to be a legal fiction. A successful trust depends on creating some degree of separation between you and the trust assets.

The most important aspect of a trust able to provide legal protection of your assets is that the trust is irrevocable. This does not necessarily mean the trust cannot be undone or modified. Rather, trust assets would be unreachable by creditors since they would not really be taking them from you. When a trust is revocable, creditors can still reach it because you have the direct power to undo the trust and take back the assets. Even if you are the beneficiary of the irrevocable trust, it is the transfer of control of the assets to the trustee that legally separates you from your assets. Exactly how much protection is provided by a trust depends on the law of the jurisdiction where it was established. Some attorneys advise you to establish a trust in certain overseas jurisdictions since it is nearly impossible for creditors to reach assets held there.