Post 9/11 Asset Protection Planning – asset protection planning has evolved to become a part of most mainstream estate and financial planning

Who needs an asset protection plan? We all do. There are millions of lawsuits filed in the United States each year. Our society is blessed with a judicial system that allows conflicts to be resolved in a civil manner. Unfortunately, imperfections in our system of jurisprudence lead many to believe that the process is too expensive and too uncertain.

Over the past ten years, asset protection planning has evolved to become a part of most mainstream estate and financial planning. Professionals no longer question the need for an asset protection plan. Instead, they focus on balancing the cost and extent of the plan with the benefits gained.

Post 9/11, it has become increasingly difficult to set up legitimate off-shore trusts and bank accounts. The US Patriot Act and other anti money-laundering legislation enacted as part of the war on terrorism has led financial institutions worldwide to become extremely bureaucratic and difficult to deal with. Although off-shore features to an asset protection plan should not necessarily be avoided, the additional cost associated with establishing an off-shore trust or account has to be taken into consideration. A purely domestic asset protection plan may be effective if a thorough analysis and follow-through is completed.

Berry Moorman’s asset protection planning analysis begins by looking at each client’s exposure to the myriad of claims that are pursued against families or businesses in similar circumstances. Clearly, a physician or an owner of a business that stores and uses toxic chemicals to manufacture products has greater exposure to lawsuits than a teacher or consultant.

Most Americans protect their families and businesses by purchasing insurance. Therefore, analyzing each client’s insurance policies is important to determine whether proper coverage and adequate policy limits are in place. Unfortunately, in some cases, insurance coverage is not available or is cost prohibitive.

Components of an Effective Asset Protection Plan

To be effective, a logical and user friendly plan must be in place at the time a claim is made. If a clear and detailed plan is already in place, emotional turmoil will be minimized and the individual’s professional team will be able to quickly “ramp up” a defense. An effective asset protection strategy will –

  • Level the playing field by immediately slowing the claimant’s momentum and delivering a clear message that the claimant is facing a trench by trench defense and
  • Provide incentive for the claimant to settle the claim at a fraction of the costs and attorney’s fees that will be required to pursue the case in the court system.

Most importantly, the asset protection plan must be legally sound and be able to stand up to scrutiny by the claimant or his advisors if it is “laid on the table.” Only legitimate and legal estate and financial asset protection planning will ultimately be effective.

Common Asset Protection Considerations Are:

Are assets properly titled? For example, a single person who owns real estate and then gets married but does not transfer the property into the names of husband and wife fails to take advantage of available protection from a creditor claiming the equity in the property. If that same real estate is retitled in the names of husband and wife as tenants by the entireties, the equity in the property is protected against most creditors’ claims against either husband or wife (but not both). Also, certain personal property and bank accounts can be held by husband and wife as tenants by the entireties and be afforded the same protection against creditors. A single person can protect the equity by establishing a properly registered and independent entity like a limited liability company or subchapter S corporation.

What type of business entity will provide protection? The most vulnerable way of doing business is through a sole proprietorship and the most vulnerable entity is a general partnership. Both expose the owner or partners to 100% personal liability for creditors’ claims.

For years both “C” and “S” corporations were the preferred entities to limit an owner’s exposure to third party claims. Over the last decade, limited partnerships and limited liability companies have become popular. This is because, generally, a member of a limited liability company is not personally liable for the debts of the company. Similarly, a limited partner of a limited partnership is not personally liable for the debts of the partnership.

The choice of the best entity can only be made after analysis of the specific circumstances involved. Although a limited liability company has become the first choice for many professionals, there is an asset protection trap. A single member limited liability company will be considered a “disregarded entity” by the IRS for income tax purposes. As a result, it generally will be taxed as a sole proprietorship using the owner’s social security number. In two recent decisions, courts have gone beyond the income tax analysis to hold the owners liable for single member limited liability company obligations.

With these developments, setting up a limited liability company with multiple members will afford better protection.

What assets were transferred, both before and after notice of a claim? Under certain circumstances a transfer will be deemed a fraudulent conveyance because it was an attempt to avoid payment to creditors. In that case, the property will be available to pay claims against the original owner of the property.

This area of the law is fraught with examples of people attempting to abuse the legal system. For example, we often hear the statement “I don’t have anything; all of my assets are in my wife’s name.” Depending on the reason for and the timing of the transfer to the wife, a creditor may challenge this type of conveyance under the Uniform Fraudulent Conveyance Act. If the creditor prevails, the transfer will be set aside by the court and the transferred asset will be treated as the original owner’s property and be available to pay his creditors.

Is an asset protection planning trust appropriate? Clients who are in a high risk business that is subject to claims that would not be covered by insurance or are potentially above policy limits should consider an asset protection planning trust as part of their estate and financial plan. For many years these trust were set up exclusively in off-shore jurisdictions. However, there now are a number of states in the United States that have adopted legislation to allow for the same or similar protection domestically.

Generally, we recommend that the trusts: (1) be tax neutral, (2) allow assets to be kept in the US, (3) provide maximum privacy (which is different from secrecy), and (4) be established in a jurisdiction with a very short statute of limitations for fraudulent conveyance claims, and with laws favorable towards trusts attached by a beneficiary’s claimants.

In summary, to obtain maximum protection, it is important to engage in the planning process with a skilled and diverse professional team that includes your attorney and your tax and insurance advisors.

For assistance, contact Randolph M. Wright at our firm’s Birmingham office at (248) 645-9680.