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7 Golden Rules of Asset Protection Planning - Werner Law Firm

The Golden Rules of Asset Protection Planning

Troy Werner and his family

Written by Troy Werner

Troy Werner has been an indispensable asset to The Werner Law Firm since joining in 2009, providing exceptional legal service to its clients.

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POSTED ON: October 10, 2022

Asset protection planning is not just a tool for the exceptionally wealthy to minimize tax liability or avoid losing a specific asset. You can also use asset protection to protect individual properties and assets from potential litigation, which can be especially concerning for professionals in certain high-risk occupations. Think doctors, property developers, accountants, lawyers, and […]

Asset protection planning is not just a tool for the exceptionally wealthy to minimize tax liability or avoid losing a specific asset. You can also use asset protection to protect individual properties and assets from potential litigation, which can be especially concerning for professionals in certain high-risk occupations. Think doctors, property developers, accountants, lawyers, and even chefs.

However, setting up asset protection planning is easier said than done, and there are many ways to make mistakes.

One of the most fundamental errors is to focus on asset protection for an arbitrary purpose. Asset protection is not an inherently desirable goal for an estate plan – many estate planning tools aim to distribute assets to your heirs while minimizing their tax liability and reducing the hassle associated with probate.

Often, however, asset protection planning ostensibly anchors an asset to you, like homestead exemptions.

Furthermore, some asset transfer methods – like gift giving – are exceptionally susceptible to being classified as fraudulent transfers in the middle of a creditor dispute. Learning to balance your asset protection needs and estate planning goals – and using the right tools for the job – is essential.

What Does Modern Asset Protection Planning Look Like?

Financial tools can be pretty flexible, and there have been ingenious (and confusing) examples of asset protection throughout the decades, including complex offshore transfers and management systems. It can be hard to encapsulate all the ways you can protect assets from a creditor in a single piece of copy.

The more complex an asset protection plan becomes, the more difficult it is to manage. It is also more likely to be torn apart and scrutinized by regulatory bodies and financial agencies tasked with collecting your outstanding liabilities. In other words – simple is often best, and it's healthier to look at asset protection planning as an additional layer of insurance rather than a challenge to cheat the system.

3 Methods of Asset Protection Planning

In general, there are three basic ways of isolating an asset from the scrutiny of any would-be creditors interested in your wealth:

  1. Through a partnership or LLC
  2. Through a tenancy by the entirety
  3. Through an asset protection trust

A partnership or LLC is a business entity effectively created to limit liability and separate yourself from your business assets. If the ship goes down in an LLC, you don't sink with it.

A tenancy, in its entirety, is a property ownership structure reserved for properties owned by married couples. It protects the asset against most claims, provided they are issued against only one spouse. In this setup, both individuals within the marriage own the property as one person, with mutual undivided interest and right of survivorship.

An asset protection trust is an irrevocable living trust that places an asset within the control of a trustee for the benefit of a chosen beneficiary (or multiple beneficiaries) while separating you from the said asset. You can use this to reduce the size of your estate for tax planning purposes and protect assets from creditors.

Without further ado, let's get to the rules.

Don't Wait for Asset Protection Planning

This might be the most important rule. Asset protection plans are only helpful if they are actually in place.

Suppose you have any risk of eventually being pursued a liability that you can protect yourself against (meaning, no government debts, tax debts, or child support/alimony payments, for example). In that case, you should instate an asset protection plan long before you need one.

This is because most courts don't look favorably on attempts to shield assets in the middle of litigation.

Always Formulate Your Own Plan

In the modern day and age, it might be tempting to Google a state-specific form for establishing an LLC or trust, download the PDF, print it out, and have it notarized the same day. But with that convenience comes a high hidden cost.

You do not want to hinge the fate of your protected asset on the quality of a boilerplate legal document. When planning for asset protection, always work with an estate planning and legal professional.

Asset Protection Planning Isn't an Insurance Policy

Asset protection plans are a great way to shield specific assets from litigation and potential creditors. They are also an excellent way to minimize your estate before probate.

But they are no substitute for a lawsuit, malpractice, or any essential insurance policies you should invest in as a high-profile professional. It may be an additional cost, but it will more than pay for itself should the worst pass.

Trusts for Personal Items, Partnerships for Business Assets

Keep these separate. Do not place business assets in a personal trust, and do not create a family LLC for your assets.

Once you start mixing these up, they become less than airtight. It becomes easier for creditors to attack and take a business entity apart if you fund it with personal assets, on some technicality or clause. Furthermore, trust laws are an established and rock-solid way of ensuring your assets are safe – as long as you've drafted, notarized, and appropriately funded your trust.

Hiding Money Offshore Isn't Always Foolproof

In most cases, the United States can demand money in offshore accounts and expatriated wealth be repatriated home. This is especially true if the government has good reason to go after your money (such as tax debt). Yes, even from Swiss bank accounts.

There may be some benefit in keeping money outside the US, but there's no guaranteed protection for your wealth.

It's Tough to Protect Assets From Bankruptcy

Bankruptcy can be incredibly costly. Some forms of bankruptcy force you to liquidate everything you have to satisfy your liability before forgiving the rest.

However, assets that are no longer under your control cannot be liquidated (such as the contents of an asset protection trust), and an LLC going bankrupt cannot pull you down with it.

Protecting your assets is essential if you carry a substantial risk of bankruptcy in your business dealings! In the past, bankruptcies allowed you to retain a good amount of assets without needing an asset protection plan. This is no longer the case.

Know Where Your Assets Are

This rule goes back to the importance of formulating your plan or at least being present in the planning stages of your asset protection plan.

Always keep on top of where your money is going. Additionally, visit and revise your financial planning as often as you need to. There's little use to an asset protection plan if you don't know where your money is. Always know what's happening with your money, and contact us to hire one of our trained professionals serving areas such as Bakersfield, Encino, Lancaster, and Los Angeles.

7 Golden Rules of Asset Protection Planning - Werner Law Firm

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