Asset protection is the art of arranging a person’s affairs in a manner that safeguards his or her property from lawsuits and the claims of creditors. Liability insurance offers some degree of peace of mind against creditors’ claims, but insurance policies have many exclusions and all policies have caps. Properly drafted and executed, an asset protection plan can allow a business owner to withstand multi-million dollar claims. In addition, the plan should prevent claims and lawsuits from disrupting the business and allow the owner to continue operations through the same entity, the same employees and managers, and at the same location. While federal law has some applicability to asset protection (particularly in the bankruptcy context), state law is especially important in devising an appropriate plan. The laws of all 50 states allow for significant asset protection planning, and some states (such as Texas) have laws that are especially conducive to asset protection planning.
Depending on the state in question, planners utilize a variety of techniques that provide peace of mind and allow business owners to focus on growing their businesses. These techniques make use of trusts, life insurance policies, annuities, retirement accounts, and homestead exemptions for primary residences. Some techniques are especially sophisticated, such as Section 678 trusts (sometimes referred to as Beneficiary Defective Inheritor’s Trusts) and domestic asset protection trusts (DAPTs). But even more straightforward steps such as properly drafting a partnership or limited liability company agreement (or amending an existing one) can offer significant benefits.
People can generally decrease the amount of their property that is subject to future creditors by irrevocably transferring property. For example, suppose a person gifts his or her child a lake home and is then sued successfully by a creditor. The creditor cannot seize the lake home because it is no longer the property of the debtor. Naturally, most people do not consider transferring their property to others as an ideal solution, although that is sometimes acceptable if the transferee is the person’s intended heir. The attraction of asset protection planning is that it offers the best of both worlds: it protects property from creditors while still allowing the owner to use and enjoy the property.
The earlier a person begins estate planning, the greater the realized benefits. This axiom is especially well-illustrated n the asset protection context. If people postpone planning until their creditors have obtained court judgements against them, their options for protecting their wealth can be dramatically curtailed. People who utilize asset protection techniques while battling a legal judgment are often accused of making “fraudulent conveyances” of their property, conveyances which courts can refuse to honor. In contrast, people who begin planning earlier can take advantage of an array of perfectly legal techniques to protect their assets.