Asset Protection Planning and TechniquesTax Professionals' Resource
October 10, 2012 — 1,071 views
Asset Protection Planning and Techniques
If a client’s personal assets are placed in a commercial enterprise, the possibility of that business being victimized by a creditor based on “alter ego” or some other theory will increase exponentially. In most cases, personal assets should be placed in a trust that is properly drafted and correctly funded.
Asset protection planning tries to strike a balance between ensuring that the client has sufficient control of the assets, but in such a way that creditors cannot maintain that the asset protection structure and the debtor are actually identical.
In today’s faltering economy, consumers’ finances and assets are at risk. Virtually the only way in which they can protect what they have from those who want to take it is to create a viable asset protection plan. In addition, thirty percent of all potential lawsuits never happen because there is an asset protection plan in place.
With this in mind, clients can use any or all of the following techniques:
● They can transfer their assets into a limited liability company (LLC) because creditors cannot attach any debts to its membership interest. Consequently, the shares they own in an LLC will be protected from all creditor liens. The judgment holder or creditor can only own a “charging order” against the distributions the LLC makes. They have no claim on any of the LLC’s assets, and they cannot take any of the funds clients receive as salary, or any assets that bought or sold by the LLC. In addition, no creditors will have any ability to collect as long distributions from the LLC are avoided.
● If clients transfer their assets into an irrevocable trust, no debt they owe can be levied against them because technically they are no longer the owner. They can legally name a friend, spouse or child as the trustee and keep actual control of the assets while relinquishing legal ownership and control.
● Clients can also convert their assets into certain vehicles that fall into the “creditor exempt” category. These include annuities, homestead property, pension plans, IRAs and life insurance policies.
Insurance is still needed
Asset protection planning should never be used as a substitute for professional and liability coverage, and it is meant to supplement this insurance. Plaintiffs are not always deterred when they discover that such a plan is in place, and it will not cover the legal fees when a client is faced with a lawsuit.