Asset Protection Strategies
By Dustin Nichols, Mark Ziebold, & Alan Eber
People need to protect their assets for many reasons including:
- Expanding legal theories of liability.
- Outrageous jury awards sparked by bias against successful professionals, the wealthy, and business owners.
- A change in societal values from a focus on building your own wealth to looking for someone to sue to obtain easy money.
- Deep pocket syndrome.
- Estate and income taxation.
- Governmental regulations that lead to increased fines, penalties, scrutiny, and headaches.
- Changes in financial and economic circumstances (i.e., economic downturns or new legislation affecting the ability to operate a business).
Now more than ever, it is wise to plan before need. Unfortunately, clients are often searching for the cheapest solution and do not appreciate the benefits of professional asset protection planning. Here are some myths about asset protection that you can print up and share with clients to help them understand that asset protection is a service well worth retaining:
1. “I can’t get sued. I’m too careful.” You need do nothing wrong to find yourself on the wrong end of a lawsuit. Many believe that because they’ve never been sued before, their chances of being sued in the future are slim. You may be careful and still get sued. It’s not what you do, but how much you own (the value of your assets) that determines lawsuit vulnerability. Are you a business owner with employees? If any employee makes a bad decision that gives rise to a lawsuit you should be prepared to be sued. If the decision of another person can give rise to liability for you (i.e. employees, family members, etc.) then it does not matter how careful you are because you can be held liable for certain actions of other people.
2. “Buy our ‘packaged program’ and avoid paying potential creditors.” There is no “one size fits all” program of asset protection that fits every situation. Avoid those who tell you that their plans will also eliminate income and estate tax obligations. Many clients who buy the prepackaged program also fail to properly implement any required steps that promoters leave to the clients. Due to these failures, the pre-packaged programs often are immediately destroyed by aggressive creditor attorneys.
3. “I’ll hide my assets.” For small amounts, hiding may work. But for substantial assets (real estate or a small business), hiding is not an option because it will not work (especially in our computerized age). If you can use the internet to find out most information about a debtor to you, why wouldn’t your creditors be able to do the same? Private investigators who are trained in finding hidden assets can do amazing things with a name and very little other information. Hiding assets is often a synonym for lying about your assets. Do not do either because hiding them will not work and lying about your assets is a good way to be found in contempt of court.
4. “Asset protection is only for the wealthy.” Anyone with assets is a potential target. You don’t have to be guilty to be a victim. How would you feel if you lost the few assets you do own? If you have assets, they need protection. Several well known investors have commented that the first million was the hardest to make. If you are successful, do you want to take the risk that one poor decision will wipe out everything (and cause you to start over again)?
5. “Asset protection is too costly. I can’t afford it.” Protecting your assets is not too costly, and probably will not take more than a few hours of your time. The better question here is, “Can I afford NOT to conduct asset protection planning?” The average family can gain strong protection for their assets for a few thousand dollars. Larger fortunes (in the millions) can be protected often for $10,000-$20,000, and there are many protective steps that cost absolutely nothing. It is true that you get what they pay for with professional advice and planning. If you wouldn’t go to the cheapest doctor or dentist to fix those problems, why choose the cheapest asset protection option in the marketplace?
Consider a doctor who complains he does not have the spare cash to set up the few entities he needs to safeguard his $3 million net worth and believes the $15,000 asset protection fee too great a cost. However, he spends $65,000 a year for malpractice insurance. This same $65,000 policy only covers malpractice claims, and only for one million dollars. Next year the good doctor will pay another $65,000 (assuming his premiums do not increase) for the same limited protection. In comparison, this physician can get complete protection against any lawsuit, in any amount, for the rest of his life, for less than one-fourth of what he pays each year for malpractice insurance. So, which is the better deal…insurance or asset protection? You can’t think of asset protection as an expense. It’s an investment—a great investment—if you truly want financial security!
6. “Corporations will protect you from business claims.” Corporations offer protection, but attorneys usually also sue the corporations’ officers—the directors. If your corporation doesn’t have sufficient assets or insurance to satisfy a claim, lawyers will find a reason to sue you as an officer or director. Additionally, if you fail to observe the corporation formalities, the courts will often ignore its existence, pierce the corporate veil and hold you personally liable for the obligations of the corporation.
7. “Insurance is all I need.” Judgment creditors will not stop with your insurance. They want it all. Some insurance companies will try to deny coverage when there is a claim as they are regularly in the business of denying claims when they are presented with them. Currently because of the economy, you may find that your insurance company is insolvent when you need them. Insurance is your first defense and should be used in every asset protection plan; however, you could be sued for more than your coverage, or your policy may not cover situations where you thought it would. Insurance will not protect against divorce, bankruptcy, or tax problems. Asset protection will if done in a timely fashion.
Large malpractice policies make attractive litigation targets. After you are asset protected, a moderate amount of insurance to pay for a defense attorney when you’re sued may, in the appropriate situation, be all that is needed. However, prior to the running of the statute of limitations on fraudulent conveyances, it may also make sense to maximize insurance coverage to ensure that proper protection is in place during this time of exposure.
With today’s unpredictable jury awards, you cannot foresee what damages you may someday be forced to pay. There are also policy exclusions and loopholes that let your insurer deny coverage. Additionally, your insurer does not always defend a claim that is insured. The many “bad faith” claims against insurance companies prove this point. Insurance cannot take the place of an asset protection plan.
8. “Avoid lawsuits by canceling your insurance.” Lawyers prefer to make claims against those who have insurance because the insurance company many times will settle to avoid the cost of litigation. However, if you don’t have insurance, litigants will look to your assets. Without insurance, you, not the insurance company, will have to pay the cost of hiring defense lawyers. A lack of insurance may discourage some lawyers; however, others will use the services of an investigator to find your assets.Lack of insurance does not make you judgment proof. Keep a reasonable amount of insurance in force, if only to pay the cost of your defense.
9. “I’ll just transfer my assets to my family.” If you transfer assets to your family after a claim has occurred, the courts will take the money back from them. If you made yourself insolvent by giving assets away, the gifts are legally invalid. If your family members are lying to courts and other lawyers in depositions, do you think they will escape perjury or other liabilities for their actions? Do you really want to bring other family members into the litigation process and give them exposure? How strong are those family relationships and will they do this irrespective of the risk that it will pose to them? Will bringing them into the litigation process strain or break those family relationships? It is often not worth it to place a family member in a situation where he or she will be tempted to lie or hide assets for you.
10. “Family Limited Partnerships (FLPs) protect assets from creditors.” FLPs are often promoted as cure-all asset protection devices. FLPs can be part of an asset protection plan, but only part. Often most clients who form a FLP do so in an incorrect manner from an ownership perspective and also incorrectly administer the FLP. If one or both of these characteristics are present then it is highly likely that the FLP that the client is relying so much on will not ultimately resist the attacks from plaintiff’s attorneys.
11. “Offshore Asset Protection Trusts prevent creditors from enforcing a U.S. judgment in a foreign jurisdiction.” True. However, U.S. courts may hold you in contempt if you refuse to repatriate the assets (provided you have the legal power to do so). To avoid contempt, you must divest yourself of legal control over those assets. Most clients resist giving up all control and if they do, they leave themselves open to an attack of a contempt charge. Offshore planning, if properly done, should be structured so that the client does not have any legal control to avoid this type of attack.
About the Authors
Dustin Nichols, J.D. is a Distinguished Faculty Member for Lorman Education Services, a national provider of continuing legal education seminars and often speaks on the topic of Integrated Estate and Asset Protection Planning. He conducts private seminars for large CPA firms and financial professionals on estate strategies and advanced wealth preservation techniques.
Mark A. Ziebold, J.D., LL.M is the owner of the Ziebold Law Group. He concentrates his practice in estate planning, trust administration, charitable organizations, asset protection, business formation, athlete representation, family office services, and estate, gift, income, and generation skipping tax planning.
Alan R. Eber, J.D., LL.M practiced law in the fields of foreign asset and tax protection and wealth strategies. He is a pioneer in the asset protection field and a highly sought after speaker on wealth planning and protection. Since 1974, Mr. Eber has assisted clients in establishing a wide variety of wealth preservation structures.