Asset Protection Planning

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Asset Protection Planning

What is asset protection planning?

In these times, with the real estate bust and economic downturn, it is likely that most attorneys have had or will soon have a client seek his or her advice about asset protection planning, sometimes referred to by the term of wealth preservation planning. Every attorney who has, as a part of a real estate transaction, prepared a deed to a husband and wife as tenants in the entirety, formed a corporation or limited liability company, drafted a premarital agreement or prepared a will with a trust containing a spend thrift clause has engaged in an element of asset protection planning for his client. There is no body of law identifiable as the law of asset protection and courts rarely refer to it in reported cases. Asset protection is a term used to describe a broad area of strategies and methods encompassing the management of legal risks and provides a backup defensive strategy in the event there is a loss which results in money judgment. Asset protection has been defined as, "risk management planning that is designed to discourage a potential lawsuit before it begins or to promote a settlement most favorable to the client". Asset Protection is about taking chips off the table when times are good. Asset protection is not about cheating existing creditors or hiding assets. By the time that a person has signed a personal guarantee that pledges all their assets for a loan, or they have a serious accident, or they incur some other significant liability that threatens to wipe out their wealth, the time for effective asset protection has passed. Fraudulent transfer laws will nullify gifts and transactions that are meant to put assets out of the reach of creditors, and fraudulent conversion laws limit a debtor's attempts to put their money into exempt assets.

One of the characteristics that make asset planning difficult to define is that there is no perfect strategy that will protect all assets all the time. The tools that are available for this planning cross many disciplines of the law and the most effective asset protection plans will combine many of them with multiple layers of protection. Asset protection requires expertise in several areas of law and practice. It involves civil procedure, commercial law, business entity law, bankruptcy law, tax law, and trust and estate law. Civil procedure comprises pretrial procedure, conflicts of laws between jurisdictions, evidence, privileges, trial practice, judgments, and remedies. Commercial law includes debtor-creditor law, contracts, and the Uniform Commercial Code. A comprehensive knowledge of business entity law, including the formation, operation, governance, and defense of corporations, partnerships, limited liability companies and other business entities is crucial. The interrelation of the various entities of the debtor can have signification tax consequences. And finally, often an asset protection plan is integrated with estate planning as an additional wealth preservation vehicle. The process of designing an asset protection plan involves in a comprehensive way, assessing the facts, circumstances and objectives of the client, evaluating the pros and cons of the various options, designing a structure that is most likely to accomplish the objectives of the client and then preparing the documents necessary to carry out the plan including assisting the client to maintain and update the plan as his circumstances and the laws change.

It is important to understand that most of the laws that can defeat asset protection planning attack the transfer, not the structure. A planner needs to focus first on the available methods of transfer and the level of protection they offer and then develop the structure. The structure may encompass many of the legal structures traditionally used to limit liability, such as domestic and foreign corporations, trusts, family limited partnerships, limited liabilities companies. In asset protection planning there is not a magic bullet or impenetrable legal fortress and there are literally dozens of structures that can be used depending on the client’s individual circumstance and objectives. The challenge of preparing the best plan for the client will involve a balancing of many competing factors, including the client’s circumstances, financial condition, solvency analysis, claims or threatened claims, type of business, the assets to be protected, the timing available, tax or estate planning issues, family issues, relevant jurisdiction and their laws and the cost of instituting and maintaining the plan.

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