Asset protection planning is about making sure you’re ready should you hit bad times. Limiting creditor access to your valuable assets, while remaining within the debtor/creditor law, is an important part of running a business.
Should everyone be concerned with asset protection planning? Absolutely. If you have something that you want to protect, then you must plan. Here are eight rules you should follow to stay on the right side of the law and protect your assets should the worst happen:
1. Plan before a claim comes up
Preparing well in advance is the key to protecting your assets. Anything you do after a claim or liability arises can be reversed by ‘fraudulent transfer’ law.
2. If you plan too late, it will probably backfire
If you initiate asset protection planning after the claim has been made, this will likely make matters worse. It’s commonly assumed that anything a judge can do won’t make it worse for a late planner, but this isn’t the case. The debtor can become liable for the creditor’s legal fees, and lose the chance of getting a discharge in bankruptcy.
3. You still need insurance
Asset protection planning isn’t a substitute for professional and liability insurance. It must supplement your insurance plans. Insurance can help a debtor get through a fraudulent transfer claim. If the debtor is sued, then the insurance company can pay to defend and settle it.
4. Business assets are for entities only
Corporations, LLCs, partnerships and other business entities are commercial operations, and not for personal use. If you place personal assets into a business entity, the potential for it to fall to a creditor increases. Personal assets should go into a trust, which must be properly funded and drafted.
5. Keep a balance
You should aim to reach a balance between retaining sufficient control, so your assets don’t disappear, but not so much control that a creditor can use the argument that you (as the debtor) and the asset protection structure are the same thing. This could lead the asset protection to be disregarded on ‘alter ego’ (where an entity is set up to legally protect a person rather than being a proper operation).
6. Asset protection planning and estate planning
While asset protection planning and estate planning can work together, they can also work against each other. For example, making gifts to children and other heirs is common in estate planning, but doesn’t work in asset planning. This is because they can be dismissed as fraudulent transfers.
7. Bankruptcy is not the answer
Bankruptcy used to be seen as a good option, as debtors could wipe their debts while keeping a decent amount of assets. This is no longer the case, with changing bankruptcy laws decreasing the amount debtors can keep.
8. Keep it simple
It’s common for asset protection plans to become over complicated, to the point that it’s difficult to explain how assets are held or where they were transferred. You need to be able to answer these questions, and failure to do so could give the courts reason to disregard entities. The transfers and structure can’t be too complicated, as it increases the chances of failure. The most successful asset protection plans are generally simple, such as creating an irrevocable trust for the benefit of their heirs.