If you have assets, they are worth protecting. Whether you are a real estate investor, securities investor, business owner, professional services provider, or other individual who has accumulated a certain amount of wealth, you owe it to yourself and your family to implement an asset protection plan that will safeguard your assets, in the event that something goes wrong.
Introduction to Asset Protection Planning
What do we mean by asset protection? Let’s start with what we don’t mean. What we don’t mean is using improper techniques to shelter assets from tax obligations and other obligations. Asset protection isn’t about hiding assets, it is about securing your assets through a variety of lawful means, in order to limit your financial exposure situations that could otherwise put your accumulated wealth at risk. You don’t have to look farther than the front page of the New York Times to see that hiding assets instead of legally protecting them isn’t a good idea.
An effective asset protection strategy will utilize one or more of a variety of different tools – limited liability companies and a variety of different types of trusts among them – to shield your wealth from unnecessary exposure to potential claims. From a lawsuit against your business to your spouse filing for divorce, there are countless ways that an asset protection plan can quickly become well worth the investment.
Why Have an Asset Protection Plan?
As we have just alluded, there are numerous different reasons to have an asset protection plan in place. Simply put, if you don’t have an asset protection plan, your wealth is more at risk than you probably realize. For investors, business owners, and high-net-worth professionals, some of the risks that counsel in favor of asset protection planning include:
- Discrimination, harassment, and wrongful termination claims by staff members and other employees
- A lawsuit against your business for a defective product, slippery floor, or vehicle collision
- A lawsuit against you personally for medical, legal, or other professional malpractice
- Claims filed by your tenants for dangerous conditions arising out of inadequate maintenance
- Your business struggling and a creditor deciding to call on your personal guaranty
- Your marriage deteriorates and your spouse decides to file for divorce
“That won’t happen to me.” If that is what you are thinking, maybe you’re right. A lot of people go through life without ever facing a serious lawsuit or other threat of financial exposure.
But, maybe you aren’t one of the lucky ones. Is it worth taking your chances and not putting a plan in place?
Popular Tools for Asset Protection Planning
The following are some of the basic tools that are available for protecting your personal assets in the United States:
1. Limited Liability Companies (LLCs)
A limited liability company (LLC) is a legal entity that exists separate and apart from its owner (or owners). When property established and operated (meaning, among other things, that you have a protective operating agreement and you are not commingling the LLC’s and your personal assets), an LLC (i) shields the entity’s assets from its owners’ personal debts, and (ii) shields the owners’ personal assets from the LLC’s liabilities.
2. Asset Protection Trusts
In addition to being important tools for estate planning, trusts will often be critical components of a comprehensive asset protection strategy. One important caveat, however, is that the best trusts for estate planning will not always be the best trusts for shielding your assets from potential creditors.
For example, the revocable living trust is quickly becoming one of the most-popular estate planning tools, because it allows individuals to plan their estates outside of probate while also retaining access to – and control over – their assets during their lifetime. However, with this access and control comes the risk that your creditors will be able to “step into your shoes” and satisfy your debts using assets that they pull out of the trust. This risk can be avoided with various types of irrevocable trusts; however, as their name suggests, irrevocable trusts can limit your ability to access trust assets while they are protected.
Nonetheless, for protecting personal assets, an irrevocable trust will often be the smartest choice. For example, say you own a piece of investment real estate that you have no intention of selling. Say you also run into financial trouble, and creditors begin knocking at your door. If your property is in your name, it could be fair game for your creditors. But, if it is sitting in an irrevocable trust – because all you want to do is hold onto it – it will generally be safeguarded against your creditors’ claims.
One specific type of trust that is commonly used for wealth preservation is the domestic asset protection trust (DAPT). A DAPT is what is known as a “self-settled trust,” which means that the person who creates the trust can also be named as a beneficiary. DAPTs are only available in certain states, and they must be carefully documented and administered to ensure that their assets are “judgment-proof” and otherwise safe from personal liabilities.
3. Prenuptial and Postnuptial Agreements
When it comes to your marriage, a prenuptial agreement or (in some states) a postnuptial agreement can be the most effective tool for protecting your assets in the event of a divorce. Most states’ laws provide broad flexibility for crafting the terms of pre- and postnuptial agreements, and courts will generally enforce the terms of agreements that satisfy the necessary legal requirements. If you have substantially more assets or earn significantly more than your fiancé or spouse, putting an agreement in place can protect you from unmitigated alimony, property distribution, and legal fees, in the event that your marriage comes to an end.
Finally, here is no substitute for a good insurance policy (or, perhaps more appropriately, good insurance policies). Auto liability, errors and omissions, malpractice, business, and other insurance policies can all help protect your assets against claims in litigation.
Not only will your policies cover any liabilities up to your purchased limits, but oftentimes it won’t be worth it for plaintiffs’ attorneys to pursue compensation above and beyond what they can secure from the insurance companies. This is especially true if you have other asset protection tools in place.
Personalizing Your Asset Protection Plan
Crafting an effective asset protection plan is all about figuring out what makes the most sense, given your unique personal circumstances. Your business or profession, your family circumstances, your accumulated wealth, your marital status, and even your health can all come into play. While trusts are often the best option for personal asset protection, by no means should they (or anything else) be considered the “default” solution for protecting your wealth.
Contact Jiah Kim & Associates For More Information
At Jiah Kim & Associates, we provide asset protection planning services for individuals in the United States and abroad. We aren’t afraid to stand in the gap and help you come up with a plan that will help protect your interests if things go wrong. If you would like to discuss how best to protect your wealth, schedule a consultation to get started or call (646) 389-5065 to speak with an attorney about your needs today.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.
I am a married US citizen residing in California with 2 adult children. My wife and I desire to purchase an apartment in Amsterdam to rent out to gain appreciation and a little rent. It would be purchased all cash. I am wondering whether it would be best to purchase by forming a US formed LLC or a DAPT (domestic asset protection trust)? I have a revocable family trust already but gather it might not be suitable. I understand the rent earned is taxable and depreciation is on a 27 year schedule can be written off with an LLC, but how does this work with a DAPT?
I plan to purchase other offshore real estate in a few years. Someday, a few years in the future we might stay in this apartment,
who knows. Please either email me or call me on 858-205-3872. Looking forward to speaking with you. Richard Grant
Hello Jiah, I really praise your article to help out the people to understand the values the asset protection planning in their life. Keep up on sharing valuable information.