Asset protection

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Asset Protection (sometimes also referred to as debtor-creditor law) refers to a set of legal techniques and a body of statutory and common law dealing with protecting assets of individuals and business entities from civil money judgments.

Asset protection began to develop as a stand-alone area of the law in the late 1970s. It began coming into prominence in the late 1980s, with the advent and the marketing of offshore asset protection trusts. Colorado attorney Barry Engel is credited with the introduction of that concept and the development of asset protection trust law statutes in the Cook Islands.^[1]

Over the years, this new field of law enjoyed a marginal reputation, but started going mainstream in the mid-1990s. A 2003 article in the Wall Street Journal claimed that 60% of America's millionaires have considered engaging in asset protection planning.^[2]

Contents 1 Legal substance behind asset protection 2 In Depth Legal Article on Asset Protection 3 Personal Residence 4 Conclusion 5 References

[edit] Legal substance behind asset protection

There are literally dozens of various asset protection structures in use today. The specific structure best suited for each person will depend on: (1) the nature of the asset being protected (i.e., different structures are used to protection rental real estate, a personal residence, a bank account, a retirement plan, etc.); (2) the timing of the claim or lawsuit; (3) the debtor's risk adversity; and (4) the aggressiveness and the intelligence of the creditor.

For example, when seeking to protect a personal residence, there are approximately 7 different options (according to some asset protection articles written by an asset protection attorney-expert Jacob Stein.^[3] These may include: transferring ownership to a living trust with a generic name, transferring ownership to an irrevocable trust, encumber the residence by borrowing against it, recording a naked deed of trust, selling the residence on an installment basis to a family member, selling for cash to a third-party. According to Jacob Stein simply changing legal title to a living trust with a generic name may work to defeat the claims of some creditors, but not most. For someone who wants real protection, a better option may be an irrevocable trust or an outright sale of the residence.

It is preferable to engage in asset protection planning before there is any need for it. Engaging in after-the-fact asset protection planning may be deemed to be a fraudulent transfer allowing the creditor to set aside the planning.

Depending on the assets you seek to protection, here are some possible strategies. Reprinted with the permission of Jacob Stein from his February 2007 article on Asset Protection Planning for Surgeons.^[4]

[edit] In Depth Legal Article on Asset Protection

The term "asset protection" is commonly misunderstood. Many believe that it refers to the techniques used to shield a debtor's assets from creditors' claims. Because it is impossible to "bulletproof" a debtor, asset protection involves structures and techniques that make it more difficult and expensive for a creditor to reach a debtor's assets. The objective is to change the creditor's economic analysis, making the pursuit so difficult and expensive, the creditor will either give up or be willing to negotiate on terms more favorable to the debtor.

Asset protection does not deal with secrecy or hiding assets. Hiding assets is an ineffective means of shielding them from creditors because a debtor would usually have to disclose his assets in a debtor exam, under penalty of perjury. A properly structured asset protection plan allows the debtor to reveal the nature and the structure of the plan without sacrificing its efficacy. The general proposition underlying asset protection is that a creditor can reach any asset owned by a debtor (with some statutory exemptions like the homestead exemption and certain types of retirement plans), but cannot reach assets not owned by the debtor. Consequently, the focus of all asset protection planning is to remove the debtor from legal ownership of assets, while retaining the debtor's control over and beneficial enjoyment of the assets.

Asset protection that works must be very practical. The planning is done within a statutory framework, but it is the practical implications of the planning that shape the exact nature of the structures and techniques. For example, a creditor may be able to make a successful legal argument that a given structure should not stand, and thus be able to retrieve the debtor's assets. But, if making such an argument will be sufficiently expensive and time consuming, the creditor may never make it. Practitioners must take into account both the substantive legal issues and the practical aspects of a plan. This article will focus on the more practical aspects and results of asset protection planning, touching on the underlying substantive law only in passing.

Several different factors determine the nature and the type of planning that should be used for a given client. The three most important factors are: (i) the identity of the creditor pursuing the client, (ii) the nature of the assets that will be pursued by the creditor, and (iii) the extent to which the debtor is willing to go to protect his assets. The identity of the creditor refers to how aggressively the creditor will pursue the debtor's assets, and how knowledgeable the creditor is about debt collection laws. The more aggressive and knowledgeable the creditor, the more obstacles we need to erect in his path. The nature of the assets refers to the specific assets owned by the debtor. There is no "magic bullet" asset protection strategy; different structures are used to protect different types of assets.

The extent to which the debtor is willing to pursue asset protection is important in determining the appropriate strategy. Some debtors may be willing to do nothing more than shuffle paper agreements, whereas others may be willing to go through a divorce, move assets offshore or sell their home. Practice Pointer: All asset protection planning implicates income, transfer and property tax issues, and fraudulent transfer laws. While a discussion of these issues is beyond the scope of this article, it should be noted that many debtors approach the fraudulent transfer analysis from a very practical perspective, as follows. Assume the debtor is facing a significant lawsuit risk with a large anticipated judgment. The debtor has two asset protection choices: (i) do nothing and stand to lose all assets when the plaintiff becomes a creditor, or (ii) engage in some asset protection planning. Because the common downside of a fraudulent transfer is the creditor's ability to set aside the transfer, a debtor may have nothing to lose (other than the transaction costs) by engaging in planning that may (or may not) be deemed a fraudulent transfer. From a creditor's perspective, a successful fraudulent transfer challenge gives the creditor the legal right to pursue the transferred assets. Having a legal right to do something does not mean having the actual ability to do so, and does not mean that the pursuit of the transferred assets would be cost effective.

[edit] Personal Residence

The QPRT is a great example of the practical efficacy of asset protection. While it does not afford the debtor a complete level of protection for the residence, it makes the residence sufficiently unattractive to a creditor so that in practice, creditors very rarely pursue residences in QPRTs.

[edit] Conclusion

Creditors not motivated by personal animosity, but by financial incentive, will always take into account the economics of their collection actions. Practitioners should keep in mind not only the underlying substantive law, but the obstacles presented to the creditor by the practical implications of asset protection planning. Depending on the creditor's intelligence and aggressiveness, timing, the debtor's risk-tolerance and other factors, the strategies discussed in this article may significantly tilt the economic equation in the debtor's favor.

[edit] References