ASSET PROTECTION BASICS

The Basics of Asset Protection

The ultimate goal of an asset protection plan is to significantly reduce risks by insulating your assets from the claims of creditors. Unfortunately, most individuals significantly under-estimate the potential risks that could ruin them. A properly implemented asset protection plan designed and put in place before a lawsuit or claim arises helps deter potential claimants, and prevents asset seizures following judgment.

If you haven't already implemented your asset protection plan, waiting is a dangerous risk. The longer your plan has been in place, the stronger it will likely be.

Who’s at Risk?

In our past newsletter My Castle, My Assets, we discussed how courts were designed to protect our property rights, but often failed. And in Socialism USA Style, we pointed out that big ships and government systems are slow to change course, and how things appear as 1930s deja vu all over again. In the meantime, the markets have taken the bait that there are finally post-GFC green shoots to get excited about. Maybe, but stealing another famous quip from the great Yogi Berra, It ain’t over, till it’s over.

In any event, whether it’s time to get bullish, or merely another lull before the storm, we first ask: Who’s most at risk today of losing their assets?

The simple answer is that anyone that owns assets is at risk.

Why? Because when you own something of value, creditors and others can seize it. Asset seizures can occur before or after a court ordered judgment. In the case of police and other government authorities, read here how they can seize your assets without ever charging you with a crime. And you think your cash is safe? Visit this link to learn why it’s not.

Bank accounts can easily be frozen, and cash seized. Stock and mutual fund accounts immobilized. And liens filed against real estate make it impossible to sell. The court system is filled with civil lawsuits seeking financial damages for every conceivable claim. Plaintiffs’ attorneys often work on a contingency fee basis and are all too eager to file suits – the more they sue, the more money they make. Government agencies can process senseless claims without concern for the legitimacy or cost.

To be sure, some individuals are more at risk simply because they own financial resources. ‘Deep pocket’ individuals are always targets. And professionals like architects, developers, entrepreneurs, lawyers, physicians and specialists, and financial advisers, are all particular targets. Individuals with substantial assets (over $500,000), partners in closely held businesses, and landlords and landowners are always at risk.

Even individuals of modest means are not immune from creditors’ claims. Anyone with assets could suffer the catastrophe of financial ruin from one unexpected event.

Consider, for example, the physician or investor who owns an office building and rents it out to himself and others. Because the landlord is a doctor or high net worth individual, a skilled plaintiff’s lawyer will increase the damages claim well beyond compensation to include emotional distress and punitive damages. Property and umbrella insurance often fall far short, failing to cover a multi-million-dollar claim for damages, and then the physician’s or investor’s other assets are used to satisfy the claim.

Less predictable are government claims against former property owners when environmental claims are discovered years later. Clean-up costs can easily exceed millions of dollars, and added to that, the insurance is now cancelled following the sale. It is no consulation that the property owner had no knowledge of the unknown environmental damages, as it is a strict liability claim. The importance of safeguarding property cannot be over-emphasized.

And of course new government rules and regulations impacting assets are particularly concerning.

Is there a teenage driver in the family? Do you have employees that run errands or provide business services in company or personal vehicles? This puts you again at considerable risk of being sued in the event of an accident. Despite liability and medical insurance coverage, the driver’s family is often sued by passengers for pain and suffering and mental distress. And it’s no reassurance if the families are close friends, because the victim’s family’s attorney is motivated by an easy opportunity to make money.

Or maybe you are getting married soon. Hardly anyone contemplates divorce at the start of a marriage, but it is a well-known fact that statistically it is more likely today for a marriage to fail than endure.

Truth be told, protecting assets means different things to different people. And risks vary widely.

In general, it’s all about protecting your assets from claimants looking to take them. Claimants could be private parties, or a government agency. And with very little effort, anyone can obtain a clear picture of your personal and financial information. Individuals who stand out as successful and wealthy, often become unwanted targets.

A director or officer of a company can lose personal assets when the company is sued. And retirement doesn’t protect you from malpractice or liability exposure from earlier years, as applicable statute of limitations can extend decades into the future. In many cases, the courts allow creditors to seize assets held in the names of wives and children, as well as retirement funds.

The horror stories are endless and increasingly common occurrences.

For many, protecting assets also means government threats of trying to control you, and your assets. We’ve also discussed here the importance of protecting assets in a changing world. The threats also come in the form of border controls and currency controls as discussed here and here. But once you demystify how an international trust works to protect against real and perceived threats, there is peace of mind realizing how easy it operates, as found here.

Many individuals are motivated by maintaining their financial and personal freedoms as sovereign individuals. We explored these concepts in the Sovereign Individual, Part One and Part Two newsletters. And an entire chapter is devoted to living as a sovereign individual in our book Offshore Living & Investing, 2nd edition, setting forth how it works in practice.

The individual reasons and motivations behind the planning varies. But what they all have in common is the desire to keep safe a lifetime of hard work and investing. That’s why anyone with something to lose needs to implement some level of planning before it too late.

Planning strategies are driven by the risks, the type and value of assets, and motivations of the individuals. Follow this link to learn how to achieve quality asset protection planning.   

Asset Protection Strategies

There are various strategies when implementing asset protection, including segregating assets by risk classes and equity values, which reflect the nature of different types of assets. And separate legal structures – particularly with charging order protection – held in an international trust designed with aggressive asset protection, is a great way to control assets …see how here.

What works best, in part, depends upon the types and values of assets, personal goals and objectives, and even the type of creditor claims likely to pursue you. But note that hiding or secreting assets is not a hallmark of quality asset protection.

The type of entities and businesses that hold or own the assets vary widely. Corporations - both C-Corps and S-Corps - can be held in a trust structure. Limited partnerships are another common form of entity that can be held under the trust structure ...but beware of using a general partnership as they are potentially fraught with dangers.

Better yet, a limited liability company (LLC) offers the benefit of both corporations and partnerships. And when created properly, and registered in the correct jurisdiction, it can virtually stop all creditors in their tracks with charging order protection features. The charging order can literally prevent judgment creditors from accessing assets within an LLC.

Since it is all too easy to have your assets seized for a multitude of alleged sins, it is always important that your assets are protected. Assets that are not in your personal name are not easy to locate or seize.

And ideally, the legal structures should be established in a jurisdiction where the statutory law makes it difficult for claimants to fish for information, does not have information sharing treaties with other countries, and does not recognize foreign judgments.

Importantly, in the legal structures where the assets are held, you should control the assets directly as the manager / president / general partner. This means that under normal circumstances, there is no reason for the trustees to participate in day to day activities, and here is how it works.

A properly implemented trust then holds title to the legal structures. The trust agreement is created between the person establishing the trust (typically referred to as the settlor), and sets forth provisions essential to their planning. The planning typically includes life-time planning (e.g. pre-nuptial and/or asset protection provisions) and how and where the assets are distributed upon death (the dispositive provisions).

Estate tax minimization is also typically designed into the trust agreement.

There are two basic types of trusts: revocable and irrevocable. A revocable trust is one in which the settlor reserves the right to revoke the trust. But the irrevocable trust provides an opportunity for superior asset protection - when properly implemented - as the irrevocable nature and spendthrift provisions segregate the assets from lawsuits and claims against you personally.

Another important design of the trust agreement is the trust protector. Consider this person the ‘watch dog’ to make sure all provisions of the trust are carried out. Under normal conditions the person creating the trust is typically the trust protector. The protector has the power to replace the trustees, relocate or redomicle the trust to another venue, and maintains an important veto power over trustees’ actions.

Past newsletters have discussed the benefits and pros and cons of using domestic vs. offshore trusts. This has been a hot topic, particularly as many of the domestic variety have failed. Follow this link to learn which is better, and why.

We have often written about the superior benefits using an international trust for asset protection. Visit this link to view complimentary Past Articles on many of these topics, and more.

Conveying Assets Into the Legal Structures

The critical element in protecting assets is the ability to move those assets to safety when circumstances dictate.

If you are already in the middle of a lawsuit or government asset seizure that appears to be going badly, the question of moving assets is very critical. Courts in many countries will deem the transfer of assets to be fraudulent if done untimely. Each venue has its own time limit to define a fraudulent conveyance. If transferred untimely, a court can compel the repatriation of assets and even hold you in contempt of court.

However, if there are no known or threatened claims or lawsuits, you are pretty much free to do as you wish with your assets. The best time for asset protection is when you and the assets are not under threat. The sooner you put in place an asset protection plan, the sooner you will sleep better at night, even if a claim or lawsuit unexpectedly materializes later.

Should an event occur at a later point in time, you are not then personally transferring liquid assets (e.g. cash, stocks, and bonds) or encumbering hard assets (e.g. real estate). Instead, protecting assets within the designed structure created years earlier can easily place the assets out of reach of even the most persistent claimant.

In the meantime, you can manage the assets right at home, or pre-plan for an international presence, as discussed here.

Unfortunately, many individuals only engage in ‘reactive protection’. They falsely believe they have taken sufficient steps to safeguard themselves. Or that clams and lawsuits are only a matter of bad luck, or bad timing, that results in someone else’s misfortune. They believe that bad things happen to other people, not them. Yet this false sense of reassurance leaves their assets exposed to attack when they fail to consider the likelihood of predictable misfortunes, or less predictable events.

Some creditors’ claims are legitimate. But too many claims are spawned by our already overly litigious society, like personal injury claims, contentious divorce proceedings, and failed business or investment ventures. And state and federal legislation imposes liabilities where they never existed before. Professionals and business owners today, for example, are now exposed to new liabilities stemming from the Americans with Disabilities Act, the Family Medical Leave Act, sexual harassment claims, and more.

This means we need to implement proactive protections in advance of a threat in an all-encompassing plan. Follow this link to see just a few of the many benefits of an international trust. The updated book, How to Legally Protect Your Assets, 2nd edition, is packed full of great advice on the above, and many more topics.

You don’t expect your home to burn down, or to be involved in a serious car accident. Yet you carry insurance for both of these events. Then why wouldn’t you do the same to protect all of your assets from the endless other claims and lawsuits that are increasingly common today?

One more tune comes to mind before we go to the finish...

When I was younger, so much younger than today,
I never needed anybody's help in any way.
But now these days are gone, I'm not so self assured,
Now I find I've opened my mind, and opened up the doors.

Beatles lyrics to 'Help'