Asset Protection refers to protecting an individuals and businesses from civil judgments by using methods, systems, techniques and procedures developed from statutory law (regulated by Congress or state legislatures) and common law based on court decisions.
Asset Protection Planning is a strategic, preemptive preparation to prevent creditors from obtaining assets in the event of a civil judgment. It does not mean that a person ignores his debt obligations. It means that a person will control his debt obligations.
Plans are all encompassing, whereas protecting your home entails protecting a single asset. Though it is good to protect a single asset, one must keep in mind “flow through” liability. Liability can be passed or transferred just as proceeds, profits and cash revenue can be passed and transferred.
Personal liability is different from business liability, but it is possible to mix the two. However, it is also possible to compartmentalize or separate liabilities and this is a main objective of asset protection plans. A skilled planner will understand the options available for specific circumstances.
Oftentimes, it is beneficial to go offshore, which may increase security and privacy, in addition to providing interesting planning opportunities, such as greater rates of return on investments and asset protection. All of these considerations are built into an asset protection plan.
Do you need Asset Protection? The emotional hurdle is as to whether or not you think you need Asset Protection. The first question is, do you own anything? If you do, you are someone who should understand the basics. This is the reason we have provided this educational and informative guide.
Whether or not you need Asset Protection depends on whether or not you own any assets. If you do, you are vulnerable to many of the potential entities, such as creditors and judgments that can potentially attack your assets. It was once thought that only the rich needed to protect their assets. New tools and techniques are available and are widely used, in estate planning, through insurance products and pension etc., to practice asset protection.
It is a simple fact that nine out of ten lawsuits filed and litigated in the world occur in the US. If you have assets, you are most likely a target. When your assets are visible, you are the bull’s eye. You and your belongings are what litigators refer to as “deep pockets.” Even if you create a stealth lifestyle, your assets are discoverable by a motivated creditor.
The core goal of Asset Protection is to set up your business affairs in such a way that raises the bar for the professional takers. It does not mean that a person ignores his debt obligations. It means that a person will control his debt obligations, and your asset protection plan is in essence a proactive step in performing self-help tort reform. You in fact will control your assets and your life, instead of the courts.
Asset Protection does not give you the authority to commit fraud or engage in illegal behavior. There is a legal strategy and systematic planning that occurs when you protect your assets from creditors. This plan is specific to your assets and your financial situation and must comply with the IRS and the law.
With Asset Protection Planning, you will organize your business and personal affairs in advance of duress, in order to reduce or eliminate liability exposure or financial misfortune by placing assets beyond the reach of future creditors. Asset protection planning has also become a full-grown sub-specialty of estate planning.
Asset Protection Planning is a science and as in all areas of science, there are ethical issues.
Science – any systematic knowledge or practice
Ethics – a set of principles or moral conduct
The roots of Asset Protection are founded in debtor-creditor law. The goal is to remove the assets from the legal title and ownership of the debtor while the debtor retains control and beneficial enjoyment of the assets. An Asset Protection Plan should change the financial face of the client so that creditors have a much more difficult time attaching and seizing the assets, making negotiations favorable to the debtor. A properly constructed asset protection plan also allows the debtor to answer honestly in the face of a judge in court.
The goal is not to avoid debts; the goal is to control debts and settlements. The word debtor may scare you or bring negative connotations at this time because your debts are currently paid. Not only is this understood, but also, it is the most beneficial time to protect your assets. The word debtor refers a person in a in a “post” state of affairs as the accused or judged; in your current state you may have no creditors. However, there are “assumable risks” that you take for granted.
Ownership and Control – Learning to Separate
An American legend and tycoon of the 1930’s and ’40’s, John D. Rockefeller, believed that you should minimize your risk by owning nothing, but controlling everything. This American icon set a standard for preserving wealth and protecting assets. Over the years, a field of law emerged mainstreaming its way into debtor-creditor courts and establishing a basis in Statutory Law.
Literally, thousands of techniques have evolved for separating ownership (or title) from control and beneficial enjoyment. Every asset had a best way for protection depending on the type of asset, the financial control over the asset and the situation of the owner of the asset. The possibility of a creditor attacking the asset depends on the availability and ease necessary for the seizure and the aggressiveness and intelligence of the creditor.
Protecting assets falls into general philosophies. These include transferring ownership by way of person or trust, encumbering the property financially, and recording a naked deed of trust, selling assets under long-term contract. The objective is to choose real protection rather than to set up a smoke screen.
Assets must be protected before there are any claims by creditors otherwise the creditor may claim a fraudulent transfer of assets.
What is an Asset Protection Plan?
Every plan is different, but every plan must fit within the statutory framework and within the assets and their needs. First, the planner must identify and quantify the risk of the client. Then the planner must analyze the asset and the structures available for that asset. The planner should take great care in the profile of future and potential creditors. The more sophisticated the creditor the more encumbrances over the assets should be in place.
Transferring any asset falls under the laws and the tax issues of the jurisdictions involved. A fraudulent transfer is a dream come true for a creditor and may give them automatic domain over the asset and the legal right to pursue the transferred assets. This is why we say that the assets should be protected when the seas are calm.
Very few of us would hesitate at arranging our affairs to pay less income tax. The majority of people think it moral to try to reduce estate and inheritance taxes. It is legal to reduce taxes without committing fraud or tax evasion. In law, obligation is defined by “duty” and “Duty of Care”; it means what you owe by specific circumstances.
Then what Duty of Care does a person owe an injured party? There is a famous saying by lawyers in answering this question, “that depends.” Herein is the answer to the question. “Is it ethical to do asset protection planning?”
Should you become the injured party, you will be subject to the ethics of others and will have no control over the outcome or the consequences you will suffer. One could argue that the party who is right will prevail. There are no guarantees and there is no magic wand.
Your solution could be a combination of asset protection trusts, family limited partnerships, insurance, LLCs, or many other various tools in the toolbox. Be aware that the toolbox is filled with many options when the financial seas are calm and that once your assets are financially challenged or in duress, these options become limited.
What is a Trust?
There are many definitions and different ways to explain what a trust is. Below are a few definitions all explaining what a trust is.
• A trust is the right, enforceable solely in equity, to the beneficial enjoyment of property of which another holds the legal title.
• A trust is a legal relationship in which one person (or qualified trust company) (trustee) holds property for the benefit of another (beneficiary). The property can be any kind of real or personal property–money, real estate, stocks, bonds, collections, business interests, personal possessions and automobiles. It is often established by one person for the benefit himself or of another.
• A trust is a fictitious legal entity (not a bricks and mortar entity) that owns assets for the benefit of a third person (beneficiary). It is common to put whole bank and brokerage accounts, as well as homes and other real estate, into a trust.
• A trust is a relationship in which a person, called a trustor, transfers something of value, called an asset, to another person, called a trustee. The trustee then manages and controls this asset for the benefit of a third person, called a beneficiary. An asset is any kind of property.
You will find many definitions in different states or different law books. The above meanings all mean the same thing.
How does a Trust work?
Generally a Trust involves at least three people: the grantor (the person who creates the trust, also known as the settler or donor), the trustee (who holds and manages the property for the benefit of the grantor and others), and one or more beneficiaries (who are entitled to the benefits).
The Grantor (or settlor) of the Trust is the person who set up and gave money to the Trust. The Trustee of the Trust is the person charged with keeping the assets safe, invested properly, and finally distributed to the Beneficiary at the proper time. The Grantor can decide how the money must be kept (in interest bearing accounts, in real estate, or only in government insured FDIC accounts, etc.), and when it may be distributed. The Grantor of the Trust can also be the Trustee of the Trust, if the Grantor decides to set the Trust up in such a manner (e.g., Grantor sets himself up to be the Trustee of a Trust for his child).
How is a Trust used?
What are the uses of a trust? Trusts have several uses and they can be of much benefit when properly set up and managed. One of the uses of a trust is to provide flexible control of assets for the benefit of minor children. A trust set up for the benefit of minor children can avoid the necessity of further legal proceedings, such as the appointment of a conservator. A conservator is someone who is appointed by the court to control the assets of minor children. Conservators are restricted by law and must be bonded and file annual accountings with the probate court.
Children cannot legally handle their own financial affairs before they reach the age of 18. One purpose of creating a trust for a child is to assure the trustor that the child will be benefited but will not have control of the trust assets until the child is older. In establishing a trust, the trustor selects a trustee and specifically instructs the trustee how the assets will be used for the beneficiary. A trust for the benefit of minors often takes effect when both parents have died. It is usually set up to provide for the support, care and education of the children until they have reached the age set by their parents to actually receive the assets being held by the trustee.
Putting property in trust transfers it from your personal ownership to the trustee who holds the property for you. The trustee has legal title to the trust property. For most purposes, the law looks at these assets as if they were now owned by the trustee. For example, many trusts have separate taxpayer identification numbers. But trustees are not the full owners of the property. Trustees have a legal duty to use the property as provided in the trust agreement and as permitted by law. The beneficiaries retain what is known as equitable title, the right to benefit from the property as specified in the trust.
The donor may retain control of the property. Putting assets “in” a trust does not mean that they change location. Think of a trust instead as an imaginary container. It is not a geographical place that protects your car, but a form of ownership that holds it for your benefit. On your car title, the owner blank would simply read “the Mr. Jones Trust.”
After your trust comes into being, your assets will probably still be in the same place they were before you set it up–the car in the garage, the money in the bank, the land where it always was–but it will have a different owner: the Mr. Jones Trust, not Mr. Jones
According to the IRS – In general, a trust is a relationship in which one person holds title to property, subject to an obligation to keep or use the property for the benefit of another.
The laws that govern trusts are subject to the jurisdictions in which that trust is recognized whether onshore or offshore. There are domestic trusts called onshore trusts and offshore trusts which are outside the US domain. It is critical to choose the proper jurisdiction for your trusts because not all jurisdictions offer the same protection and benefits. Some jurisdictions offer very favorable protection of assets. (Remember that the beneficiaries enjoy those very same assets without holding title). Other jurisdictions may only offer limited protection.
Most assets, titled and untitled, can be transferred to offshore locations; real estate, cash, stocks, bonds, securities, businesses, precious jewels, gold and art are examples. The Trust Company must be knowledgeable and familiar with the statutes and legislation in order that the trustee is afforded the best protection and services available.
The primary benefit of a trust is protection. A judge cannot compel the forfeiture of an asset in a jurisdiction which he does not rule from or from which he has no authority. Therefore, the assets remain safely in place where they have been all along. Offshore trusts are especially powerful tools of protection since it is unlikely that a creditor would spend the time and money in litigation for the slim chance of gaining anything. A creditor would be forced to begin litigation in the jurisdiction of the trust (if the jurisdiction will even hear the case). The very heart and purpose of trust legislation as set by their statutes is to create a durable entity. It is very much like the expression “chasing your tail” and this is not a desirable result for a creditor.
While in some jurisdictions, you can name yourself as the sole beneficiary, in others you cannot. This is another reason why a plan must be strategically created to fit your individual needs. It is important that the trustee be bonded and licensed to provide trustee services. In some cases, insurance companies may stand in as the trustee. In any event, the beneficiary may remove the trustee and replace them if they are not satisfied if and only if the provisions have been made in the operating agreement. Again, this is why an experienced and trusted company should be employed for your Asset Protection Plan because technically the beneficiary owns nothing.
If the sound of owning nothing scares you and makes you skeptical, understanding the legal concept of ownership and custody may put you at ease. A person or entity with custody has full possession and control over a thing regardless of who the owner is. Only the owner can pass this custody and possession, but once it is passed the custodian or possessor (sometimes the same and sometimes not) have the full benefits according to the law. Now you know that placing your property into a trust does not increase your ability to be removed from the benefits of the property or asset.
Often an offshore LLC is used in conjunction with the formation of the trust. This LLC is the management LLC inside the trust and owned 100% by the trust. You operate the trust on a day-by-day basis, unless you are in duress, and then by operating agreement policy, the management of the LLC is passed to a licensed and bonded trustee on a temporary basis until the time of legal duress passes. The trustee that the trust is passed to is outside the jurisdiction of the judgment and therefore does not have to comply with creditors or with the judgment. The assets then remain safely within the trust. This agreement for the trust is set up before any duress occurs avoiding any fraudulent conveyance.
The time for transfer for avoiding penalties of Fraudulent Conveyance varies in different jurisdictions and by the nature of the asset as well. Some jurisdictions have more favorable movement of assets, but there is one steadfast rule – the assets that are protected with the greatest security are moved before duress, or as we say, when the seas are calm.