The Basis and Advantages of Asset Protection
A well-crafted asset protection plan can be an excellent lawsuit deterrent.
Contingent fee lawyers will only proceed with a case if they like their odds of winning. That’s because they don’t get paid for losing a case.
You become a less desirable target if others believe your assets are untouchable. Unlike low-hanging fruits, protected assets are located high up a tree, inaccessible to none but the most determined of claimants. If you make your assets difficult to access, predator plaintiff’s attorneys and their clients will likely look for an easier target elsewhere.
The critical factor is that you must have these plans in place before a claim arises, to be protected against that claim. Otherwise, the plaintiff can argue ‘fraudulent conveyance’ law to get the assets from you.
If a case does proceed to trial, your asset protection plan places a legal shield over your assets. Winning a lawsuit against you as an individual does not automatically give them access to your assets. An asset protection plan puts a barrier between the direct connection and control you have over your assets. This keeps them separate and distinct from you as an individual. It separates your various legal tools from one another as well. A plaintiff will have to file a lawsuit against each of the vehicles protecting your assets. This can quickly become tedious and expensive – and just enough to turn an opportunistic plaintiff away.
An asset protection plan can also be an inducement for an early settlement. Rather than try to pierce your plan and go through a time-consuming trial, a plaintiff may opt to settle. This can save you not only time, but money as well. Even if you have to pay a certain amount, chances are, the settlement will be nowhere near the original demand. Paying a defense attorney $30,000 to protect you rather than $5 million is an economically valid decision. You can and avoid a drawn-out, emotionally taxing trial. The peace of mind alone pays for itself.
Asset Protection Strategies
So, what legal tools are available to protect your assets?
The key to protecting your assets from a lawsuit is to surrender complete control over them. The courts cannot use them to settle a judgement against you if, legally speaking, they no longer belong to you. Begin by transferring your assets to an asset protection vehicle or vehicles, depending on the amount of assets you have. You could place them in a family limited partnership (FLP), a limited liability company (LLC) or some other instrument that offers you the best protection for your type of assets.
As a rule, you should avoid creating a single legal entity to hold all your assets. Using different asset protection instruments for each type of asset is an effective and efficient way to discourage frivolous claims. It would encourage a claimant to sue you if they can access all your assets when they sue just one entity. The opposite, that they would have to file separate lawsuits against several different entities, would discourage them, particularly if the cost to do so were excessive and the odds of recovery were reduced.
Modern asset protection strategies now give you the option of using some or all of the following:
- Domestic trusts
- Offshore trusts
- Limited Partnerships
- Equity Stripping
- Retirement Plans
Make certain your attorney explains to you the plusses and minuses of each one before coming to a decision. It is smart to consult a trustworthy professional in the field. The world of domestic and offshore asset protection can be confusing and overwhelming to the uninitiated. An objective and experienced guide can help you reach a decision that works best for you.
Qualified Retirement Plans
One very effective asset protected tool are qualified retirement plans.
There are still a few income tax shelters that are sanctioned by the government. Some of these include tax-deferred retirement plans such as an IRA, 401 (K) and company pension plans. These instruments are protected from personal injury and malpractice claims under federal or California law. It makes sense to regularly put as much as you legally can into these funds. In most states, your money is 100 percent protected. Of course, this is under the condition that you don’t make withdrawals until at least the age of 59½. Early withdrawals are taxable and, worse, your opponents can tap them to satisfy a judgement against you. Maximizing your contributions to these funds reduces your taxes and can simplify estate planning in the long run.