Whether you are a small business owner or not, asset protection is something to consider as part of your overall estate planning. Anyone can be at risk of facing a legal judgment or creditor at some point. The best move is to be proactive and put protections in place early for your assets. That is why an asset protection plan should be included in your goals. Asset protection strategies are widely varied, so discussing your options with your estate planning attorney before settling on any particular plan is a wise move. There are asset protection strategies that should be avoided.
All asset protection strategies are not illegal
There is a common misconception among clients that asset protection is inherently illegal or fraudulent. While there are certainly techniques that could be improper depending on how they are accomplished, asset protection is not fundamentally against the law. The reality is that we are all free to arrange our assets in a way that protects them from unnecessary loss, as long as the methods we choose comply with applicable laws. The only time fraud is really an issue is when the true purpose of the plan is to hinder creditors from collecting valid debts. Basically, you can avoid the appearance of fraud by having your asset protection plan in place well before creditors’ claims arise.
Do not wait until after a legal claim is made
The goal of asset protection strategies is to protect your money and property from future creditors or legal claims. It is a mistake to wait until after a creditor is coming after your assets to try to shield those assets. That is when the appearance of fraud becomes a problem. For your asset protection plan to work that way it is intended, you must establish that plan while you are still solvent and not dealing with existing creditors or judgments. Also, the sooner you start creating your plan, the more choices you will have available.
Learn to identify potential creditors before it is too late
One aspect of asset protection that causes trouble for many clients is knowing how to identify likely creditors or sources of legal claims. It is much easier to choose the appropriate asset protection strategies when you know who your creditors will likely be. That knowledge makes your strategies more effective. In order to limit your exposure to potential legal liability, here are some strategies to consider:
- avoiding high risk real estate or other investments
- declining to loan cars, boats and other dangerous instruments to others
- avoiding joint ownership in dangerous instruments
- including indemnification language to business contracts.
A “standard” asset protection plan may not fit your needs
As is true with most estate planning tools, asset protection cannot be a one-size-fits-all endeavor. Put another way, you cannot rely on the asset protection plan a relative or friend may have recommended. Because it worked for them does not mean it will necessary work for you. Asset protection plans need to be drafted on a case by case basis. Not everyone has the same assets or potential creditors. Not all asset protection strategies work for every type of asset. Your asset protection plan must be customized in order to work best.
Selecting the wrong kind of trust to protect your assets
While trusts are very effective estate planning tools for a variety of reasons, not just any type of trust can provide asset protection. One of the biggest mistakes people make is assuming a revocable trust will protect their assets the same as an irrevocable trust. A revocable trust may be preferred, as it allows the trustor to retain control over the assets in trust. However, that simple fact is why a revocable trust will not accomplish true asset protection. If you still have control over the assets in a trust, then they are not properly shielded from creditors. Even with an irrevocable trust, you must be sure that the transfers are not considered fraudulent conveyances made for the sole purpose of hiding assets from creditors. Be sure to discuss trust options with your estate planning attorney.
Asset protection alone is not enough
When you are looking to create a proper asset protection plan, you need to also consider possible inheritances from relatives. This is one important issue that is often overlooked by clients. Future inheritances need to be structured so that they provide maximum flexibility and protection against creditors, as well. Combining inheritance planning and asset protection as a part of your comprehensive estate plan is the way to go.
Join us for a FREE workshop! If you have questions regarding asset protection strategies, or any other estate planning matters, contact Gaughan & Connealy for a consultation either online or by calling us at (913) 262-2000.