You may not know exactly what asset protection is, but you likely have already engaged in it at some point during your life. In fact, you probably currently have one or more types of traditional asset protection planning in place. The problem is the type of planning you have right now may not be enough to protect you, your family and your assets.
What Is Asset Protection Planning?
Asset protection planning is the positioning or repositioning of assets to preserve and protect your property in advance of a claim or the threat of a claim. This type of planning will not be effective to shield your property from an existing claim. Instead, it must be done long before there is even the hint of a claim. In fact, if you transfer assets to shield them from existing creditors, it could be considered a fraudulent transfer, legally known as a “fraudulent conveyance,” resulting in legal penalties. Further, if someone is not an actual creditor – such as someone who has threatened to sue you but not done so, or someone you intend to divorce – and you transfer assets to avoid having to use them to satisfy a potential judgment, that is also a fraudulent conveyance.
(If you’d like to know more about fraudulent conveyance and factors that suggest a fraudulent conveyance, Wikipedia has an excellent article.)
The goals of asset protection planning are to provide an incentive for settling a claim, improve your bargaining position, offer options when a claim is asserted, and, ultimately, deter litigation.
What Is Traditional Asset Protection Planning, and Why Does It Often Fail?
There are several types of traditional asset protection planning that have been around for years. The most common is liability insurance – automobile, homeowner’s, umbrella, malpractice, etc. You probably have at least one liability policy in place right now. While liability insurance is an absolute necessity, it may actually encourage a lawsuit since it is perceived as “easy money.” Aside from this, liability insurance often fails because the coverage is inadequate, the policies have extensive exclusions, or the carrier becomes insolvent.
Another common type of traditional asset protection planning is the use of a business entity, such as a corporation, to segregate business assets and liabilities from personal assets and liabilities.
But while a corporation may shelter your personal assets from a lawsuit filed against the corporation, the opposite is not true – if you, as the shareholder of a corporation, are personally sued, your shares of stock in the corporation are not protected from a judgment entered against you. Further, it is possible that if your corporation fails to observe certain formalities – such as if the corporation pays your personal expenses out of corporate funds – then the “corporate veil” may be pierced. In this case, your corporate assets will become vulnerable to a personal judgment.
The final common type of traditional asset protection planning is established under state law and allows residents to exempt specific assets from the claims of creditors. This may include the following:
- a primary residence (“residential homestead”)
- the cash value of life insurance
- investments held in a retirement account
Nonetheless, these state exemptions may be subject to limitations.
What Should You Do?
You may think that only wealthy people need to do advanced estate planning. But anyone who has accumulated any amount of wealth can be sued for just about any reason. The only way to fully protect you and your family is to adopt more sophisticated forms of asset protection planning.
We can help you to create a plan that will be tailored to your unique family situation and financial status. Please call today to set up your asset protection consultation.
Nielsen Law PLLC provides family focused estate planning to individuals and families in Austin, Round Rock, Cedar Park, and the Central Texas area. For more information and to learn about our firm, please contact us.