Asset Protection Overview
Asset Protection Resources
Asset protection planning is used to shield assets that would otherwise be vulnerable to legal judgments or claims by creditors. A number of legal devices exist to ensure that both personal and business assets remain in the possession of the asset-holder. The most common methods of asset protection include investment in exempt property, the creation of irrevocable and asset protection trusts, and the formation of limited liability companies and family limited partnerships.
Exemption
Certain property is considered "exempt" under state and federal law and may not be reached by creditors. Individuals seeking asset protection are typically advised to invest to the greatest extent possible in exempt property. Exempt property includes household furniture, clothing, jewelry, and tools of a trade or business. In some states, an individual's primary residence, life insurance benefits and annuities are considered exempt. Additionally, federal law exempts qualified retirement plans governed by the Employment Retirement Income Security Act (ERISA). Qualified retirement plans include pension plans, employee stock ownership plans, profit sharing, and 401(k) plans.
Irrevocable Trusts & Asset Protection Trusts
An individual may shield property from creditors by transferring it to another person. However, the transferor runs the risk that the transferee will squander the property or subject it to the transferee's creditors. Trusts play a valuable role in asset protection planning by allowing the trust creator (the settlor) to establish the terms of the trust and ensure that the trust property remains protected from all creditors.
Several types of trusts are available to protect an individual's assets. A settlor may place property in an irrevocable trust for the benefit of a child or other family member. While the property placed in an irrevocable trust cannot be reached by creditors, the settlor is also prohibited from withdrawing the trust property. An asset protection trust, on the other hand, allows the settlor to dictate the terms of the trust while also naming the settlor as the beneficiary of the trust. The settlor thus retains complete access to and control over the trust property. While asset protection trusts may seem like an ideal solution, they are not appropriate in all situations. Asset protection trusts are not available in all states and may be costly to create and difficult to manage.
Limited Liability Companies and Family Limited Partnerships
An individual seeking asset protection may transfer his or her property to a Limited Liability Company (LLC) or Family Limited Partnership (FLP). LLCs and FLPs are distinct entities that remain wholly separate from their creators. An FLP is beneficial both as an asset protection device and as an estate planning tool. FLPs allow individuals and their spouses to own only a small portion of the partnership while maintaining control over the whole of the partnership and its assets. The majority of the FLP is held by the individual's children or other designated heirs. While LLCs and FLPs offer many benefits, they are not appropriate for everyone. Creating an LLC or FLP is expensive and management may be complex.
Distinguish Fraudulent Asset Transfers
In order to be both legal and ethical, asset protection must take place before any event has occurred that may result in a claim against the asset-holder. Asset transfers after that time may be considered a fraud against creditors. An individual will be held liable if a creditor can show that the individual made the transfer with the intention of hindering, delaying or defrauding the creditor.