Asset protection planning is used to protect assets that would otherwise be at risk of lawsuits or at the risk of claims of creditors. Asset protection planning may involve preparing for the possibility of future lawsuits by rearranging the ownership of assets so that they are beyond the reach of potential creditors. In the past , planning to protect assets from the claims of creditors was almost exclusively done for high risk professionals, and asset protection often involved nothing more than shifting assets to the non-professional spouse. The situation has changed significantly in the past twenty years, as the increase in litigation and large jury awards has made everyone more creditor-conscious. If you have enough assets to require estate planning to avoid death taxes, then you probably have enough assets to require planning to protect them from lawsuits before death.

The simplest form of asset protection planning involves the ownership of "exempt" property that state law considers unreachable by creditors. Each state has its own laws defining exempt and non-exempt property. Certain property may be entirely exempt while the exemption for other property may be limited to a certain dollar amount. Examples of exempt property include:

• Primary residence in some states (including Florida) - the homestead exemption
• Household furniture and furnishings
• Clothing and jewelry
• Tools of a trade or business

Life insurance benefits may also be exempt property.

Federal law provides that most creditors cannot reach the assets held by qualified retirement plans. This includes pension, profit sharing, and 401(k) plans. Self-employed plans and Individual Retirement Accounts may be protected from creditors depending upon your state’s laws.

Personal Assets

Asset protection planning is considered to be both legal and ethical if it takes place before any event has occurred that could result in a claim against you. If you have already committed an act that could result in a claim or if you have been sued, then it is too late. Any asset transfers at that time may be considered a fraud upon creditors, in which case the law would not respect the transfers. To prove that an asset protection strategy was fraudulent, creditors must show that you had a fraudulent intent, either actual or presumed.

If property is not exempt from your creditors, you may want to consider an outright transfer of the property to family members. Valuable assets may be transferred to a spouse or relative to help protect those particular assets from claims of potential creditors. If you wish to transfer an asset, in trust or otherwise, to obtain the creditor protection that might be available under law, you must irrevocably part with much of the direct ownership and control of that asset. Transferring the ownership of assets now can help protect them from creditors during your lifetime and from estate taxes at death. Be aware however, that the gift may be squandered by a financially irresponsible child or diverted by his or her creditors or spouse in the event of a divorce. If you make significant transfers to your spouse, you may reduce your bargaining leverage in the event of your own divorce and property settlement.

As an alternative to directly transferring the property to family members, you could transfer assets into an irrevocable trust and retain no use and enjoyment of the trust property, instead limiting the use and enjoyment of the trust property to your immediate family members. The trust assets would then be safe from your creditors. Another alternative might be to transfer your residence to a "Qualified Personal Residence Trust". This strategy can reduce federal gift and estate taxes and also protect the value of the residence from creditors.

If structured properly, passing property to your children in trust can provide them with all of the benefits of property ownership without the burdens. Passing property to your children in trust also can preserve the property for future generations by protecting it from your children's creditors, including spouses, in the event of a divorce. As with protecting property from your creditors, your children must sacrifice some control over the trust property in order for it to be creditor-safe. If you are concerned with protecting a child from his or her own spendthrift tendencies, a discretionary trust that divests the child of most or all control over the trust property is a possible solution.

Intra-family transfers should not be made before considering all the ramifications and risks. The disadvantages include:

• your loss of control over the asset and any income that it might generate
• the new owner’s exposure to potential creditors
• any gift tax consequences of the transfer

Business Assets

If you begin a business without incorporating it, then all of your personal and business assets will be at risk for all debts and claims against the business. This is also the case if two or more people run the business as a general partnership. To help protect your personal assets from the risks of the business, an asset protection form of ownership needs to be utilized. The choices available in most states include:

• a corporation
• limited partnership
• limited liability company
• limited liability partnership

Please note that the asset protection provided by each of the above entities will be different depending on the state in which the entity was created.

Supplementary insurance is another strategy to protect you from the risks associated with businesses and professions, however, insurance policies have limits and exclusions.

• Policies may not pay a claim based upon the commission of an intentional act or one resulting in punitive damages.
• The amount of the claim may exceed the policy limits.

Partnerships and Trusts

During the past few years, the family limited partnership has been put forth as an asset protection device. Asset protection trusts are another asset protection planning tool.

We at the Barry Financial Group recommend that an attorney who specializes in these matters is consulted in designing your asset protection plan and preparing the appropriate documents.