The World of Asset Protection

The term "asset protection" may be unfamiliar to you, or you may have heard the term and never connected it with any need that you have or ever expect to have. Most of us pay home owner insurance premiums, not because we expect our homes to be lost to wind, flood or fire, but because we know that we are not financially prepared to survive such a loss if it occurred. We carry motor vehicle insurance (almost never enough), not because we expect an accident to be our fault, but because we know that the staggering cost of such an event would bankrupt us. Some risks can be hedged by affordable insurance and others cannot. This discussion, about "asset protection" and asset protection strategies will focus on some of these very real risks, and strategies to protect ourselves from them.

The United States is the most litigious country in the world. It has most of the world's lawyers. It files by far most of the world's lawsuits. By the tens of billions of dollars the U.S. generates most of the world's liability judgments. You can be totally innocent of any wrongdoing and be financially ruined by someone with a beef against you, a $100 filing fee and directions to the Courthouse. You can be sued for an ever expanding range of liability theories arising from everything from your ownership of real property to remarks you make to friends. You can be sued for sexual harassment for asking someone at work to join you for a drink. You can be sued for a hiring decision at your business. You can be sued on theories that on their face appear to be absolutely ridiculous. What's worse is that you can actually lose. McDonalds can lose millions for advertising "hot coffee", and then delivering it. A homeowner can be sued because their Doberman Pincher had the audacity to bite a stranger just because he broke into the home where the dog resided. That same homeowner can be successfully sued when a neighborhood child climbs over their six-foot fence and then drowns in their back yard pool. Most certainly, any American is vulnerable to being found at fault in an accident where someone claims to have been terribly injured. Often these cases produce verdicts way in excess of insurance coverage.

If you think that dealing with the risk of civil liability is bad, you have probably never been involved in an adversary relationship with the Internal Revenue Service. As the National Debt continues to skyrocket, the IRS is under increasing pressure to become more efficient and thereby more aggressive in its collection techniques. Even if you believe that you have handled your tax reporting correctly, they may take a very different view. The horror stories are legion about citizens terrorized by the IRS. Sometimes the taxpayer has the resources and the careful record keeping to prevail, but all too often the result is a huge tax lien. Once the government obtains this lien, the penalties and interest become insurmountable. There are more than a few cases of taxpayers simply committing suicide because they saw no hope of ever paying their way out and having their lives back.

Asset Protection Planning is simply a financial way of putting on your bullet-proof vest before the shooting begins. This analogy is very important because of the concepts of fraudulent transfers. It is really quite simple. Hundreds of years ago there came into our Common Law in England an ordinance which has come to be known as the "Statute of Elizabeth." This part of the Common Law was adopted by 49 of our 50 states (Only Louisiana does not recognize it) when they drafted their state constitutions. The rule quite simply creates an almost irrebuttable presumption that if you transfer an asset away from your ownership and control after you are on notice of a potential liability, then the transfer was done to defraud your potential creditors. Like closing the barn door after the departure of the horse, the implementation of an asset protection strategy after you are on notice of a liability problem just does not work. It's like putting on your bullet proof vest right after you have been shot in the chest.

The shortest summary of asset protection planning is to tell you that you must separate yourself from the legal ownership of the assets you want to protect. You must make this separation irrevocable. You do not lose the access to the benefit of these assets. A carefully crafted asset protection plan will permit you to enjoy most of the benefits of asset ownership without the greatest drawback, i.e., the risk of losing everything you own.

There are domestic strategies that are reasonably effective, including the use of family limited partnerships, domestic trusts, charitable remainder trusts, Limited Liability companies, etc. Some of these strategies are a bit less expensive to maintain than "offshore" strategies. If you want to truly bulletproof your estate, your asset protection plan (or wealth preservation plan, if you prefer) should include a consciousness of domestic strategies and a proper use of offshore products. If privacy is important to you, then the "offshore" strategy is essential.

Although this section is designed to introduced the reader to the basic concepts of asset protection, it is ironically important that you should never call an asset protection plan "an asset protection plan." That is because the theory of fraudulent conveyance asserts that if the motivation for a transaction is to frustrate creditors, then it may be deemed a fraudulent conveyance. In that event the Court will attempt to void the transaction. For that reason, there is always an alternate or at least additional reason for the transaction. It may be related to estate planning. It may be business reorganization. It may be a shift in investment strategies. In any event, there should always be a separate reason for the plan that has the effect of protecting your assets.