I am frequently asked how much an individual’s net worth needs to be in order for them to be a good candidate for asset protection planning. It’s impossible to answer with a specific dollar value, but if you are concerned that an adverse court judgment against you might wipe out your way of life, the answer may be an asset protection plan.
What Is an Asset Protection Plan?
The best place to start is by understanding what an asset protection plan is not. As asset protection plan is not a scheme to hide money or avoid taxes. Most properly designed asset protection plans are meant to be transparent and tax neutral. Simply put, the main purpose of an asset protection plan is to protect your assets from creditors.
The Right Time to Protect Your Assets
Asset protection planning can take many different forms, from simple domestic trusts to complex offshore structures. Regardless of the form, in almost every case, asset protection planning can only be used when the individual is not currently threatened with any type of legal action. Attempting to transfer assets into an asset protection plan when there is a threatened or pending claim against you is unlikely to be legally effective as it will be interpreted as a “fraudulent transfer”. The best time to implement an asset protection strategy is when there is no legal threat on the horizon
Your Options
Most asset protection plans involve the ownership of the protected assets being transferred to some third party entity, which is usually a trust. This is the most important and difficult point for some people to understand – asset protection structures require you to transfer ownership of the assets to someone or something that isn’t you. In other words, you don’t own your assets anymore. This is critical because typically you cannot transfer to a creditor something over which you have no control.
Offshore planning options have become less attractive in recent years due to IRS and US Treasury rules that require reporting of offshore accounts not just by the American taxpayer but also by the foreign bank holding the assets. Nevertheless, offshore asset protection trusts remain one of the strongest tools available. For some, the reporting requirements are a small price to pay for getting such a high level of protection from creditors.
Exotic offshore legal structures may seem sexy, but individuals shouldn’t overlook one of the most popular ways people protect themselves from a catastrophic judgment – liability insurance coverage. Asset protection and estate planners often focus on trusts and LLCs and forget what is often the first line of asset protection defense. On the other hand, for high net value individuals, increased insurance isn’t always the answer. Often the increased insurance policy limits can appear as an easy pay day for nuisance plaintiffs. Also, higher coverage amounts obviously mean higher premiums and often higher deductibles.
No asset protection structure is perfect for everyone. Each situation is unique and requires a thorough review and analysis in order to make proper recommendations for how to best protect your assets. Our law firm knows the ins and outs of asset protection well and can assist with both domestic and offshore options. The firm deals primarily in tax-neutral plans whereby the individual does not realize a tax benefit from the plan and the plans are designed to be transparent. They must be reported to the IRS and the Treasury.
If you have high net worth, an asset protection plan may be a good solution to keeping your assets and wealth as intact as possible. Contact Attorney Chris Clark and get started today.
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