Sunday, December 12, 2010

Basic Asset Protection Strategies

Today I am going to talk to you about Three Methods to Provide Asset Protection to Your Wealth.  This is not a complete list, but Three easy to implement common methods that any estate can take advantage of to shore up their Asset Protection planning.  But before I discuss why you need asset protection let’s first discuss what asset protection is.
            According to Jay Adkisson in his book Asset Protection, asset protection is pre-litigation planning to deter lawsuits and promote settlements.  The primary goal of asset protection is to bring closure to actual or potential litigation with as little disruption to the debtor’s business and with as little loss of wealth as possible.  What asset protection planners do is best described as Wealth Preservation.
                        When should Asset Protection be done?  The answer is simple – the earlier the better.  It is like buying insurance.  You cannot wait until after the accident to do the planning or purchase the insurance.  Then it is too late.  The same goes for asset protection planning.  The biggest hurdle for asset protection is the Fraudulent Transfer Laws.
            According to Adkisson, it is not the structure that is created for asset protection that should be given the greatest emphasis.  It is the method and timing of the transfer into the structure that is most important.  So what is a Fraudulent Transfer?  It is a transfer in derogation of the rights of a creditor to satisfy his judgment against the assets of the debtor.  What happens if the Court determines that a transaction is fraudulent?  The transaction is unwound as though it never happened.
            Why should we be concerned with Asset Protection?  According to SixWise.Com there are over 16 million lawsuits filed in the United States each year and this number is rising by about 12 percent each year.  The group Lawsuit Abuse indicates that of these 16 million lawsuits 1.4 million lawsuits are filed in California each year.  That is almost 7000 lawsuits filed each day the courts are open.  Therefore, the question has become not if you will be sued in your lifetime, but when.  And if you are a person of wealth you have a 100 percent chance of being suit once if not multiple times in you life.
            According to, many of these lawsuits are filed against doctors and other professionals.  With the economy that we are in and the ease of filing lawsuits many lawsuits are being filed with the “I have nothing to lose mentality” with the hope of winning the lawsuit lottery.
            So what can you do to protect yourself?  Here are three Methods to Provide Asset Protection to Your Wealth:
1)                  Protecting Your Home – Your home should not be held in your name or in the name of a living trust if you have any equity that your want to protect.  It is a myth that a living trust provides any type of protection.  Instead the home should be transferred to an irrevocable trust such as a Qualified Personal Residence Trust or an Irrevocable Defective Grantor Trust.  Both of these vehicles will add substantial asset protection.  A cheap and easy protection is filing a homestead exemption on your home. 
2)                  Protecting Your Retirement Assets – Many people believe that the assets they have in an IRA are protected from creditors.  Nothing could be further from the truth.  Only qualified pension plans such as 401K’s and Defined Benefit plans that have multiple common law employees in the plan are protected by ERISA – the federal law that protects pension assets.  If you have a significant sum in an IRA you should consider transferring the assets to an ERISA plan for the great asset protection benefits that they offer.  This may be the single best Asset Protection devise that exists.  If you remember, the Goldman’s have been unable to reach O.J. Simpsons pensions assets even though they have a $38 Million judgment against him.  This is how strong ERISA Protection can be.
3)                  Other Protections – Equity Stripping – This is an effective technique to remove equity from property by borrowing against the property.  The cash is either spent or protected with asset protection vehicles such as asset protection trusts.
The bottom line is that we should all practice some form of asset protection.  Most of us already do without realizing it.  For instance, when we buy insurance we are practicing asset protection.  The difference is whether we have a comprehensive plan to protect our assets and whether we use any of the techniques mentioned above or various other techniques that are available.  The greater your wealth the more asset protection you may need, and even this will depend on your aversion to risk and the cost benefit of the plan you design.  However, I think that in this litigious society we live in all of us should engage in asset protection based on the amount of wealth we possess.