Asset protection strategies are important considerations for wealth that is vulnerable to lawsuits, creditors, expensive divorces etc. We live in an increasingly litigious society where lawsuits are increasingly common especially in professions such as: doctors, lawyers, business owners and any professional that is at risk of being a target.
There is a plethora of options and tools for protecting and hiding your assets. These strategies have proven time and again to be the most effective in a variety of circumstances. Finding the best way to structure your assets protection plan is about knowing what options are available.
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One powerful way to protect your assets is to form a business entity which has limited liability. This is especially important for entrepreneurs or self-employed professionals to separate their personal assets from their business. Limited Liability Companies (LLCs) are the most commonly used vehicles for the separation of assets and liability..
These companies are separate legal entities whereby the owner is not personally liable for claims against the business. If there are any lawsuits or liabilities which occur through the course of conducting business (e.g. being sued by a client, creditor claims etc.) your personal assets are protected and cannot be claimed.
The other major advantage of LLCs is the existence of charging order protection in some jurisdictions. What this means is that a creditor who wins a claim against the LLC only has a right to the distributions of the LLC, not directly to its ownership. However, the protective measure is that the creditor cannot force you, as the owner of the company, to actually pay out these distributions.
At the same time, whoever has a right to the distributions is liable for the taxes, even if these distributions are not paid out. This basically means that your creditor could land up with a hefty tax bill whilst not receiving a cent. This could be enough to discourage any wise creditor from even filing a lawsuit in the first place.
Asset Protection Trusts are considered to be the strongest asset protection tools available. These are special types of irrevocable trusts where you can be both the settlor and the beneficiary at the same time. Your personal assets are transferred to the trust, which is managed by a third-party trustee, and thus they are no longer legally owned by you. However, you still receive all the benefits of these assets and can manage and control them through the trustee.
Asset Protection Trusts have proven time and again to be incredibly difficult for creditors and/or claimants to crack. They have complex structures and laws which make them almost invincible in a lawsuit. This is even more so the case with Offshore Asset Protection Trusts in jurisdictions like the Cook Islands, Nevis, and Cayman Islands. This is because these offshore trusts are far out of reach of local courts and lawyers. These jurisdictions provide numerous safeguards for the trust’s assets, offer high levels of confidentiality, and have other benefits such as tax advantages.
These days, there are also domestic asset protection trusts available in a number of states. These can be cheaper and more convenient, but they do not offer the same level of protection. Whichever type of asset protection trust you are considering forming, it is good to seek the expert guidance of a specialist, as these are complex instruments which need to be established in the correct way to work effectively.
Certain employer-sponsored retirement plans are reasonably well-protected by federal law. These plans are often exempt from bankruptcy, meaning you can hold onto them even after filing for bankruptcy.
They are also more well-protected than your ordinary personal assets from lawsuits and creditors. The level of protection can differ across states, and so you should consult the advice of your lawyer to understand what level of protection you can get through your retirement account. The other advantage is that these accounts can also offer significant tax benefits.
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In some states, home equity is protected. This means that creditors are unable to claim against your homestead in the case of bankruptcy. The level of protection varies greatly from state to state, with some providing unlimited protection and others providing none at all. Check to see whether home equity is protected in your State.
If so, it makes sense to pay off an outstanding mortgage with excess assets and wealth that you have, as this wealth would be more well protected if it is tied up in your home.
Similar to retirement funds and homesteads, annuities and life insurance can also have significant protective measures in place depending on state law. Again, this varies a great deal in different states and needs to be checked with a licensed attorney to be sure.
Examples of countries where these assets are protected include the US state of Florida, which provides unlimited protection, and Oregon, which provides protection of annuity income up to USD 500 per month.
Liability Insurance is one of the simplest yet often most effective way to protect your personal assets from lawsuits. There are various types of insurance policies which provide liability coverage in the case of being sued, such as homeowner’s insurance, worker’s compensation insurance, commercial liability insurance, and even creating a captive insurance.
You can also make use of umbrella coverage which can cover you if your first line of insurance is insufficient, and other types of insurance like long-term care insurance to protect your assets from risks like the potentially tremendous costs of healthcare in your latter years. All of these have their place in a well-rounded asset protection plan.
The final way to protect your assets is to be discrete about them. As soon as you start flaunting your wealth to the outside public, you become a target for unsolicited lawsuits. We live in a greedy, litigious society, where many people are ready to jump at the opportunity to grab your money through whatever means. Don’t make yourself a prime target.
Trusts have gained a reputation for being the most effective asset protection tools known today. They have proven to be more effective than any other financial entity at protecting one’s assets from creditor claims, lawsuits, and just about any type of legal threat.
When it comes to asset protection, not all trusts are created equal. The best type of trust that can be used to protect your assets is known as an Asset Protection Trust (APT).
An Asset Protection Plan involves placing assets into structures that offer the best level of asset protection. The best example of a multi-entity structure with respect to offshore asset protection trusts, is to combine an offshore trust with a limited liability company (LLC).
This involves the grantor establishing an LLC, who’s ownership is then transferred to the trust itself. The trust assets are all transferred to a bank account which is opened in the name of the LLC. So, to clarify: the LLC owns all the assets, and the trust owns the LLC. The grantor of the trust can then be named manager of the LLC, meaning that they maintain control over the assets in regular circumstances. However, during times of ‘legal duress’, the trust automatically transfers the control of the LLC to the trustee as a protective measure.
Another important structural consideration is who to name as trustee. It is suggested that the trustee be a reliable foreign party. The reason they should not be residents or citizens of your own domestic jurisdiction is that, as foreigners, they will be out of the reach of local court orders. They will be much more able to assert their powers as trustee and refuse to cooperate with local courts.
There are many advantages to the type of asset protection structure mentioned above. Here are just a few:
It is important to mention here the notable difference between just hiding your assets versus protecting them. There are many ways to hide assets and it can be a useful strategy. However, assets can be hidden but not protected, which means that once they are found they are just as vulnerable as your other assets.
Assets which are well-protected through one or more of the methods mentioned above will remain safe and secure even if they are found by creditors and lawyers.
In the process of determining which asset protection strategy is best for you, it is important to begin by considering the nature of the assets you are protecting.
Whether you have the majority of your wealth in real estate, equities, personal residence, bonds, cash etc. will have a significant impact on the appropriate tools to use. Understanding the nature of your assets will help you to determine exactly what asset protection measures to take, and where to place them.
Tailoring an asset protection plan is done for each individual as well as for each asset or group of assets. Different types of assets are best protected in different ways.
A diverse asset protection strategy will provide additional protection for fail-safe bulletproof asset protection. It is therefore advised to make use of a variety of asset protection tools when designing your optimum asset protection plan.
It is much easier to implement protective measures for your assets before things go wrong and you are faced with a lawsuit. Understanding all these tools will not help if you don’t actually take the necessary steps to put them in place.
Don’t wait until disaster strikes. Be prepared and take the necessary steps today.
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