A Connected View
June 1, 2012
Protecting your assets from “creditors and predators” is an important and often overlooked wealth preservation strategy. Understanding the potential threats that exist and following up with applicable action plan will better help you to preserve and protect your legacy.
When we discuss protecting assets from creditors, we are generally not referring to your personal mortgage lender or credit card companies. Rather, we are referring to legitimately protecting assets from other unforeseen creditors that emerge through, for example, business obligations or personal injury lawsuits where you are at fault. And when we talk about predators, we are mainly referring to individuals looking to take your money: divorcing spouses—your own or your children’s—and those with unmerited legal claims against you.
Fortunately, there are ways to protect your assets from creditors and predators alike. There are three overall categories of asset protection strategies:
• Entity formation (trusts and business entities)
• Liability insurance
• Shelters provided under law
Trusts may be designed such that assets transferred to them for the benefit of family members can be protected from the claims of the beneficiaries’ creditors. These trusts are generally referred to as “spendthrift” trusts and must contain proper protective language to be effective. Protection of trust assets from the spouse of a child (whether married or getting a divorce) as well as a child’s creditors may be achieved through spendthrift-trust planning.
It may also be possible to establish a Domestic Asset Protection Trust (DAPT). A DAPT is funded with your own assets; you are the beneficiary, but the assets in the DAPT will be protected from the claims of your creditors. There are some complexities involved in setting up a DAPT, and in order for it to provide protection, it must be established in one of the states that has enacted a DAPT statute.
Business entities such as corporations, limited liability companies (LLCs) and limited liability partnerships (LLPs) may also provide asset protection for you and your family.
The corporate form of organization was established in order to limit the liability of shareholders to their respective investments in the corporation. This in turn means that your other assets are protected from the claims of the corporation’s creditors; however, in order to protect your assets owned outside of the corporation, business formalities must be followed in the daily operation of the corporation.
Similar to corporations, LLCs provide significant asset protection. LLCs do not require the same level of operational diligence of a corporation. This ease of management, along with potential asset protection, makes the LLC a very attractive protective business organization.
LLPs also provide a good deal of asset protection for some clients. Unlike a general partnership—unlimited personal liability for a general partner related to the misdeeds of the partnership as well as those of other partners and employees—a partner in an LLP under state law is not responsible for the obligations of the partnership or the wrongful acts of other partners or employees.
Also, a proper level of insurance is a key to protecting assets from creditors and predators. We recommend a review of your general liability insurance as it relates to your business, professional liability, home and autos. Umbrella policies may be purchased at very low cost and provide solid protection from certain potential threats.
Additionally, there are protections provided by law, including the Employee Retirement Income Security Act of 1974 (ERISA) and the Bankruptcy Act of 2005. These laws provide some protections for IRA and qualified plan assets. There are also some protections available for funded 529 educational plans under the laws of some states.
Finally, there may be a need to structure several entities (trusts and business organizations) while obtaining proper insurance in order to achieve the most reliable asset protection strategy. Designing plans for the protection of assets from creditors and predators should be undertaken with the assistance of qualified advisors.
If you would like more information on the specific steps that you need to take to protect your own assets from creditors and predators, please contact your relationship manager or a member of our Wealth Planning Team at 303.531.8100.