Some view asset protection planning with a skeptical eye. They believe there is a moral obligation to pay one’s debts. They think that asset protection planning is immoral because it prevents a creditor from collecting on a judgment entered by a court.
The truth is the U.S. justice system is unpredictable. Defendants are faced with ever-expanding theories of liability, being sued just because they appear to have “deep pockets,” and judgments entered against them based on desired outcomes instead of the law.
In this article you will learn:
- What asset protection planning is, and what it is not.
- Your might have already engaged in some form of asset protection planning, and likely it isn’t enough.
- Attorneys may ethically and legally help clients protect their assets from future creditors, predators, and lawsuits.
What Asset Protection Planning Is, and What It Is Not
Asset protection planning is a legitimate form of wealth planning. Attorneys who engage in asset protection planning help their clients preserve and protect their property in advance of a claim or the threat of a claim.
The goals of asset protection planning are to provide an incentive for settling a claim, improve the client’s bargaining position, offer options when a claim is asserted, and, ultimately, deter litigation.
On the other hand, asset protection planning is not about avoiding taxes, keeping secrets, hiding assets, or defrauding creditors.
Planning Tip: Asset protection planning will not be effective to shield property from an existing claim. It must be done long before there is even the hint of a claim. Attempting to help a client protect property after a lawsuit has already been threatened or filed could potentially subject the client’s attorney to professional misconduct, malpractice, civil liability, or even criminal punishment.
What Traditional Asset Protection Planning Is, and Why It Often Fails
All of your clients have engaged in traditional asset protection planning at some point during their lives. The most common type of traditional asset protection planning is the purchase of liability insurance – automobile, homeowners, umbrella, officers and directors, malpractice, and the like. Unfortunately, liability insurance may actually encourage a lawsuit since it is perceived as “easy money.” Aside from this, liability insurance often fails due to inadequate coverage, extensive policy exclusions, or the carrier becoming 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. While a corporation may shelter personal assets from a lawsuit filed against the corporation, the opposite is not true – if the shareholder of a corporation is personally sued, his or her shares of stock in the corporation are not protected from a judgment entered against them. Of course, it is possible that if certain corporate formalities are not observed, then the “corporate veil” may be pierced and the shareholder’s personal assets will become vulnerable to a judgment entered against the corporation.
Finally, many states allow their residents to exempt specific assets from the claims of creditors. This may include protection for property owned jointly by spouses (“tenancy by the entirety” ownership), a primary residence (“protected homestead”), the cash value of life insurance, investments held in a retirement account, and annuities. Nonetheless, these state exemptions are often subject to limitations, such as placing a cap on the value or land area of the protected homestead.
Planning Tip: Despite their limitations, traditional forms of asset protection planning should not be overlooked:
- When possible, clients should use liability insurance as the first line of defense against a claim.
- Residents need to be aware of the limitations of their state’s creditor exemptions and expand their protection beyond state exemptions where applicable.
The Final Truth About Asset Protection Planning
Clients may drive carefully and avoid getting into barroom brawls, but they can never completely avoid all activities that create liability. Asset protection planning is not only an ethical and acceptable form of wealth planning, but attorneys and other advisors who do not advocate this type of planning are doing their clients a disservice.
The Wills & Wellness Attorneys are experienced at creating asset protection plans custom-tailored to each client’s family situation and financial status. Please call us at (720) 266-8190 or email us at email@example.com if you have any questions about this type of planning and to arrange for asset protection consultations for your clients.