Estate planning is about much more than saving taxes. Protecting your assets against the claims of creditors is equally important, if not more important. After all, the smartest strategies for transferring assets in a tax-efficient manner are worthless if you have no assets left to transfer.
Ownership and Control. These are the issues protection addresses. The law provides you with legal ways to reduce your vulnerability to loss of your family’s lifestyle and wealth to creditors and predators while still letting you maintain control. Asset protection planning strategies, properly implemented, can serve as your wealth protection plan to preserve your personal and business assets, thereby protecting your family from financial loss. Asset Protection is for anyone concerned about the loss of their wealth and family lifestyle due to litigation or the ethically challenged. If you are a business owner or medical professional, you are more vulnerable to loss than most.
Asset Protection. What it is not.
Asset protection is not about lying, hiding assets, or engaging in criminal activity to hinder, delay or defraud creditors. The law provides ways for you to protect your assets, but the key is that in order to take full advantage of the law, you must have those protections in place prior to a crisis.
Asset Protection. What it is.
Asset protection involves protecting your hard earned wealth from loss to creditors, predators, bankruptcies, and divorce using legal strategies. You can use legal structures to achieve an advantage for you. By planning ahead, you can ensure a high degree of certainty of outcome. Asset protection planning allows you to maintain control of your assets by structuring affairs to discourage lawsuits from the outset and avoid liability traps related to how property is owned (i.e., general partnerships or other joint ownership arrangements). Look at a number a of different risk areas. It is best to plan before a claim arises.
Common Asset Protection Strategies
Your first line of defense — especially if you’re a doctor, lawyer or other professional exposed to malpractice claims — should be your personal or professional liability insurance. But to shield your wealth against excessive or frivolous claims, also consider strategies for keeping your assets out of reach. These strategies may include the following:
The easiest way to protect assets from your creditors is to give them away to your children or other family members. The downside to this approach, of course, is that you’ll also lose control over — and, in many cases, enjoyment of — the assets you give away.
If one spouse — a doctor or other professional, for example — has greater liability exposure, another option is to transfer title to property to the other spouse. In a community property state like Texas, you may be able to protect assets by partitioning community property into separate property or having one spouse give property to the other spouse. Obviously, this strategy is a viable option only if your marriage is strong.
You can protect assets from your heirs’ creditors by placing them in a trust with “spendthrift” provisions, which prohibit beneficiaries from selling or assigning their interests, either voluntarily or involuntarily. But a spendthrift trust won’t avoid claims from your creditors unless you relinquish any interest in the trust assets.
An alternative is a domestic asset protection trust (DAPT), now offered by a handful of states, which purports to allow you to protect assets from your creditors even if you retain a discretionary beneficiary interest. A discretionary beneficiary doesn’t have unrestricted access to the trust assets, but can receive distributions from the trust in the trustee’s discretion. You can take advantage of a DAPT of one state even if you live in another state. An offshore trust established in a debtor-friendly foreign jurisdiction perhaps offers the greatest protection, but such a trust is expensive to set up and maintain.
A qualified retirement plan — such as a 401(k) or 403(b) plan — is one of the best places to safeguard assets. These plans generally are exempt from creditors’ claims, at least until the benefits are distributed. IRAs also offer some limited protection against creditors.
Another technique for protecting assets is to transfer them to an FLP in exchange for limited partnership interests for you and your family. A properly structured FLP also can be used to reduce gift and estate taxes on transferred assets. In general, a limited partner’s creditors cannot reach the FLP’s assets — they can only obtain rights to receive any distributions made from the FLP to the limited partner. By retaining a small general partnership interest (1%, for example), you can retain control over the property while keeping your liability exposure to a minimum.
Keep in mind that FLPs must be structured and operated carefully to survive an IRS challenge.
Level 1: State and federal exemptions
Level 2: Transmutation agreements. Changing community property to separate property and putting assets in the hands of a low risk spouse
Level 3: Forming limited liability companies (PA, PC, PLLC)
Level 4: Forming leasing LLCs to own or lease property, equipment, or accounts receivable
Level 5: Creation of FLP/FLLC to own non professional assets
Level 6: Domestic Asset Protection Trusts
Level 7: Offshore Asset Protection Trusts
Texas law itself provides a substantial amount of protection for certain assets. In most cases, these include your homestead, a specific amount of personal property, retirement accounts, 529 college savings accounts, life insurance and annuities. In our Asset Protection Program, we counsel our asset protection clients on ways to maximize the benefit of these “exempt” items.
Other, “non-exempt” assets, can enjoy a large measure of protection by the use of legal structures such as family limited partnerships, limited liability companies and on-shore as well as off-shore irrevocable trusts (revocable living trusts, which are discussed under the Estate Planning portion of this section, are not asset protection trusts). Keeping your estate from being decimated by a lawsuit is a top priority for many clients. The law strongly discourages asset protection planning AFTER you become aware of a potential claim against you. It is imperative to begin your planning now, well in advance of any problem that could arise in the future. While no particular technique is “bullet-proof”, with proper planning, a very large degree of protection and peace of mind can be achieved.
We have a 3 step approach to asset protection planning.
During this initial meeting we determine if the relationship is a mutual fit. If so, we will gather necessary data to begin formulating a protection strategy.
We meet with your advisors to come up with a consensus solution.
We meet to present the unified solution to your planning needs.
Asset protection planning is a little like buying homeowner’s insurance. You can’t insure your house after it has burned down. Nor can you obtain insurance while a neighboring house is ablaze. You probably can’t buy insurance during a severe electrical storm. The time to insure your home is well before the appearance of any imminent or potential threats.
Fraudulent conveyance laws work much the same way. Although specifics vary from state to state, these laws are intended to prevent you from transferring property with the intent to hinder, delay or defraud present or future creditors. The reference to “future creditors” doesn’t mean that fraudulent conveyance laws protect anyone that could potentially become your creditor some day. But if someone has threatened a claim or if you have reason to believe that a legal problem may arise in the future, the fraudulent conveyance laws may pose an obstacle to asset protection planning.
Like purchasing homeowner’s insurance, the time to implement asset protection strategies is when the skies are clear and there are no storm clouds looming on the horizon.
800 N. Industrial Blvd., Suite 106
Euless, TX 76039
While my address is Industrial Blvd, we are actually on Clinic Drive. Look for the tall red Super Value Pharmacy sign. Whether coming from the North or the South, you will turn off of Industrial Blvd. onto Clinic Dr. Our building is located up the hill just past the Super Value Pharmacy at the far end of the building.