Asset protection is the adoption of strategies to guard your wealth from creditor claims and other potential risks. This aspect of financial planning focuses on legally insulating valuable assets from being accessed by creditors while remaining compliant with debtor-creditor law.
Key Takeaways
- Asset protection refers to strategies used to guard wealth from taxation, seizure, or other losses.
- This kind of protection helps insulate assets legally without engaging in illegal practices like concealment, contempt, fraudulent transfer, tax evasion, or bankruptcy fraud.
- Jointly-held property under the coverage of tenants by entirety can act as a form of asset protection.
Understanding Asset Protection
The underlying principle of asset protection is to legally shield assets without resorting to unlawful methods such as hiding assets, fraudulent transfers, tax evasion, or bankruptcy fraud.
Experts often suggest that effective asset protection should begin well before any claims or liabilities arise, as it’s usually too late to act once an issue occurs. Common approaches include asset protection trusts, accounts-receivable financing, and family limited partnerships (FLP).
If an individual’s assets are modest, bankruptcy might be a more effective option than implementing an asset protection plan. However, with significant assets involved, proactive asset protection is generally recommended.
In the U.S., certain assets, such as retirement plans, are exempt from creditors under federal bankruptcy and ERISA laws. Many states also provide exemptions for specific amounts of home equity in a primary residence (homestead) and other personal belongings like clothing. Each state has distinct laws to safeguard owners of corporations, limited partnerships (LPs), and limited liability companies (LLCs) from the entity’s liabilities.
Asset Protection and Real Estate
Jointly-held property under the coverage of tenants by entirety can serve as a means of asset protection for married couples. Both partners have a mutual claim to the whole property, not just subdivisions of it.
This combined ownership implies that creditors with claims against one spouse cannot seize the property to satisfy their debt. However, if both spouses face creditor claims, the tenants by entirety stipulations wouldn’t protect the asset.
Other asset protection tactics can include transferring property or financial assets to family members or trusted associates. For instance, an heir might receive ownership of real estate or other properties, even while the original owner continues to occupy or use them. This can make it more difficult for creditors to seize assets, as legal ownership must first be established. Financial accounts might also be maintained in offshore banks to legally minimize taxes on those funds.
Related Terms: creditor, concealment, tax evasion, bankruptcy, ERISA.
