There are two different sources for potential liability that need to be reviewed when looking at asset protection strategies:
- Inside Liability: Liability that derives from a specific asset. The goal is to protect your other assets from that liability and the resulting damages. An example of inside liability would be an injury on rental property or an auto accident by an employee that you want to make sure does not attach to other assets.
- Outside Liability: Liability that is not a result of or from an asset. It is a claim resulting from a lawsuit against you personally. In this situation you want to minimize the exposure of your assets pay a judgment.
Therefore, an asset protection plan needs to look at both inside and outside liability.
Additionally, Asset Protection should be considered for your heirs and beneficiaries. You can protect them in ways you cannot protect yourself.
A creditor is someone:
- You owe money to because of an agreement, such as the purchase of products, or
- A person who is seeking to obtain a judgment against you for any reason, such as an auto accident or a disgruntled employee.
Asset Protection is accomplished by creating walls or barriers that are a deterrent and to give you leverage when resolving claims against you.
There are Five Levels of Asset Protection
To describe them think of the story of the Three Little Pigs and the Big Bad Wolf, although in my example, we have Five Little Pigs building Five Houses.
The House of Straw is the Default. Doing nothing more than take advantage of existing state and federal laws that protect certain assets, such as life insurance policies, annuities, retirement and accounts. Many of these laws are state specific.
The Bid Bad Wolf will simply Huff & Puff and blow the house down.
House of Sticks – Incorporate the Business & Liability Insurance. A corporation for any business you own and operate will provide a small amount of protection to your assets from liability of your business. Obtain or increase your professional liability insurance and/or umbrella coverage. How much liability insurance should you have? That question is impossible to answer because it depends on how badly you hurt someone. For example, if you have an automobile accident, it’s your fault, you have $1,000,000 of liability insurance and a teenage passenger in the car you hit breaks her leg, You may have enough insurance. But, if you put that girl in a wheelchair for the rest of her life, you probably can’t have enough insurance to cover the damages you caused. Thus, you could lose everything you own that is not already protected under existing state or federal laws.
The Big Bad Wolf will Huff & Puff & Huff & Puff some more and eventually blow the house down.
House of Stucco. Domestic Asset Protection Plans, such as a Limited Liability Company or Family Limited Partnership formed in Asset Protection friendly states. The only weakness to the FLP or LLC is that they don’t protect actual distributions made to the owners. Creditors could seize distributions made to an owner. However, these entities can be designed so that it is very difficult for a creditor to force a distribution.
The Big Bad Wolf will not get anywhere Huffing & Puffing. But getting a jack hammer may get results.
House of Bricks. A Self Settled Domestic Asset Trust, created under the laws of Asset Protection states, such as Utah, using all other supporting tools.
The Big Bad Wolf can forget Huffing & Puffing – he will need a bulldozer.
Castle of Granite Surrounded by a Large Mote.Off-shore, Self Settled Asset Protection Trust.
The Big Bad Wolf can do whatever he wants but you will rest assured that your assets are protected.
All of these strategies require that you remain financially solvent and that you do not violate the Fraudulent Conveyances Act.
All plans are designed for the specific situation and client. Often the strategies are combined to provide the best level of protection based on potential for exposure and a cost benefit analysis.