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Basics

The Basics – Asset Protection
Before we outline the basics of asset protection let us be clear about the fact we live in an overly litigious society where the consequences of words like justice, fair and reasonable do not hold strictly to the definition. Most people have a moral grasp of right and wrong, but this does not protect us from accidents, business decisions, medical situations and circumstances we cannot control. The most basic of all human emotions is security and asset protection plans merely give you security and control over your assets.

Specifically, when we refer to assets, we are referring to a person’s home, car, furniture, savings, investments and business. Essentially, assets are anything of value that can be seized by another resulting from a lawsuit, court order or through the action of a government agency. In reality, everything worth value is worth protecting.

Before going further, we would like to remind you that each individual’s situation is unique. Each principle we will be discussing is applicable when the unique circumstances of each asset meet the criteria. This is why we encourage personal and private consultations

Insurance

When the subject of asset protection comes up, one of the first things that comes to mind is insurance. Yes, having insurance is a great way of providing both yourself and your family with protection. In fact, acquiring insurance is usually the first step. Life, property, casualty, liability and disability are all important methods that provide this protection.

We encourage proper insurance and it would be our recommendation that insurance policies work side-by-side with asset protection plan. A good rule of thumb is to ensure that your insurance coverage is adequate and appropriate. However, insurance in its basics has little to do with control and more to do with compensation after you have lost control. We view insurance as the last wall when all else has failed.

Trusts

Another method of asset protection is trusts. An Asset Protection Trust should direct your assets while you are alive and make provisions for you to maintain control and beneficiary enjoyment even under creditor attack. This is why you must protect your assets before the attack (it is hard to dodge a bullet in midstream).

In the proper circumstances and with proper construction various types of trusts serve to detour creditors and diminish the incentives that they may have for taking your assets. Some types of trusts maintain a higher level of privacy while they legally hold up under duress.

Depending on the assets you seek to protect, it is possible that a plan encompass your business and family affairs in entirety. Although Estate Planning is important, a Living Trust alone will not stand to the test of creditors, since a Living Trust is an Estate Planning vehicle enacted through death. A Living Trust will not guard your possessions from creditors because it is within a judge’s power to penetrate the trust and award your assets to your creditors instead of your named beneficiaries. An Asset Protection Trust will also enable your estate to avoid probate for all of the assets in the Trust.

Corporations

Corporations have long been recognized as excellent forms of asset protection. The “corporate veil” alone my not be enough to keep your assets in a safe manner. Just as inheritance is “passed on” so to can liability pass on, sometimes referred to as “flow through liability.” However if you plan the course of liability you may be able to wrap some types of assets into the corporate veil enabling greater protection and security than if you claim personal ownership.

The Big Question

Inventory all of your assets and ask. “In a situation where I am put under creditor attack (regardless of the circumstances leading to duress), is this asset under my control?

These days all assets are discoverable by regulations of IRS reporting or court order. This is a principal reason to protect your assets and keep them from the reach of others. You will define the words justice, fair and reasonable when it comes to the property and assets that you control. This is a feeling of security.

Eight Key Concepts of Asset Protection
Concept #1

Judgment creditors can only take from you what you own. If you do not own something, they cannot take it! It seems simple, but so is the law of gravity. As simple as it is, it has profound impact on how most asset protection techniques work.

Concept #2

No country in the world automatically recognizes U.S. judgments, period! Think about that; no country in the world automatically recognizes U.S. judgments! To register and enforce a U.S. judgment abroad, usually a case must be litigated a second time in the foreign country. Note that in other countries, lawyers do not work on a contingency fee basis and the cost of litigating a second time will be astronomical, especially since the plaintiff has already paid for litigation.

Since no country in the world automatically enforces U.S. judgments because they have no power of decision outside their designated legal jurisdiction.

Concept #3

Nobody can take your assets away without first winning a lawsuit and obtaining a judgment. A judgment from a lawsuit does not normally expose your assets to pre-judgment attachments. There is a second court proceeding for this. The judgment is the award for damages after the damages have been proven.

Normally, in the U.S. , you have time to plan how to respond to an attack and the planning options expand if you put an asset protection plan in place when the financial seas are calm and before any attack occurs.

Concept #4

Asset protection strategies are best implemented when the financial seas are calm. Once attacks are mounted, it may be too late to do any serious protecting.

Concept #5

A creditor has to find the judgment and determine that it is worthwhile and cost effective to garnish or take it. If it is difficult to discover and then even more difficult to attach to, as in “possession”, a creditor may settle out of court and in general become more reasonable.

The other import aspect is visibility; stealth works. Flashy cars, houses, cash accounts are easily discovered and this starts the pursuit during the judgment process. However, a good asset protection plan relies on technology and the use of the laws that are in place to grant protection that is bestowed to citizens.

Concept #6

When it comes to your money, never trust anybody, especially a foreign trust company. All asset protection plans should be structured so that you are never vulnerable to any person.

Concept #7

Divide and conquer. Never mix liability-generating assets in the same entity. For example, you would never have two apartment houses owned by the same limited partnership, or you would never mix an apartment house with your securities account. Always divide and conquer.

Concept #8

Finally, the U.S. is the only country in the world that permits and encourages contingency litigation. In all other countries, it is unethical for an attorney to take a case on a contingency basis. There are very few exceptions to this. In addition, most countries will force somebody attacking your assets abroad to post cash with the court to handle the fees and costs and if the defendant is successful, it then given to the defendant.

Protecting Your Assets
Choosing the right tactic, techniques and form is critical in protecting your assets.

Many people believe that great asset protection comes through using “corporations.” However, what most people fail to realize is that there are several different types of corporations and limited liability companies. The tax consequences and applications regarding protection are different in each depending on which entity is chosen. Here are some of the types of corporations to avoid for protecting your assets.

Partnerships

Partnerships are the worst entity you could possibly be involved in from an asset protection standpoint. A partnership provides all of the headaches and personal liability of a sole proprietorship (see paragraph below), with the added twist of having a partner who creates an even greater liability. In a partnership, each partner is liable for all the actions and debts of the other partners. If one partner takes out a loan on behalf of the partnership, even without the permission of the other partners, all partners are on the hook. This also includes cases involving individual actions. For example, if one partner sexually harasses an employee and the business is sued for sexual harassment, the suit is against the partnership, and all partners have personal liability. This form of corporation is not advised for protecting your assets

Sole proprietorships

This is the second worst way to own or run a small business.

A sole proprietorship exists when someone operates a business without filing to have that business recognized as a legal corporate entity. With a sole proprietorship, there are no barriers between the business conducted and the person owning the business. This is dangerous because if a sole proprietor acting on behalf of his business commits negligence in his duties for the business that causes injury to a third person, the sole proprietor is then personally liable for any and all injuries to that third person. There is no reason for anyone ever to be a sole proprietorship because protecting your assets is a serious matter.

Corporation

Businesses mainly incorporate in order to avoid personal liability for the negligent actions of the corporation. This includes limited liability of the corporate shareholders, in addition to individual liability of the employees of the company. However, there is one important exception to the limited liability. This is in the area of personal services. Personal service liabilities include work that is done for or on behalf of clients by doctors, attorneys, accountants, and financial planners. The exception means that a physician who treats or operates on a patient cannot hide behind the corporate veil normally providing limited liability for owners and employees working in the normal course of business. If a patient sues for malpractice, the physician is named individually because the personal liability cannot be removed by incorporating.

Now here are the best tools to use for asset protection: They are Limited Liability Companies (LLCs), Family Limited Liability Companies (FLLCs) and Family Limited Partnerships (FLPs).

In this article, the term “LLC” will be used interchangeably as a term that stands for all three entities. For asset protection purposes, each entity works in the same way.

Briefly, LLCs were designed to bring together a single business organization containing the best features of the pass-through income tax treatment of a partnership and the limited liability of owners in a corporation. LLCs also provide the standard corporate protection to all shareholders and directors for any negligent actions against the LLC itself. LLCs are treated the same from a corporate liability standpoint as S- or C-corporations. For instance, doctors still have personal liability if they commit malpractice and a patient sues. However, there are major differences between LLC’s and Corporations as it relates to asset protection.

This difference involves the role of a �charging order�. A charging order is typically the only remedy a court can give to a creditor who is trying to get the assets of a debtor when the assets are in an LLC or limited partnership. A charging order does not allow creditors to sell the assets of the LLC or force any distributions of income. This is very useful in protecting your assets.

Here is an example: Assume that a patient sues and obtains a judgment against a doctor for $3 million. The doctor has $1 million in medical malpractice coverage, and all the rest of his major personal assets are in an LLC, of which he owns 100%. The patient petitions the court for satisfaction, requesting the doctor is ordered to turn the assets in his LLC over to him, but the court informs the patient that because the assets are in an LLC, the only remedy it can give to him is a charging order.

What does the patient get with this charging order? Something completely unanticipated and unwanted: Only the right to pay taxes on any income generated in the LLC but not distributed (Revenue Ruling 77-173).

Assuming that the patient manages to obtain a charging order against the doctor’s LLC, which owns his $1 million brokerage account and $1 million vacation home in Florida and further assuming the doctor earns dividend income of $25,000 a year from the brokerage account and earns a rental income of $20,000 a year, the doctor would be taking home the total $45,000 as income from the LLC to invest or spend it as he sees fit. This form of corporation is very useful in protecting your assets.

Because of the charging order, the doctor will leave the income in his LLC at the end of the year, which will trigger income taxes due by the patient. Because the patient has no desire to pay any taxes on income that he did not receive, the patient will immediately release the charging order. If there is ever a distribution from the LLC, the patient would get that money, but no creditor wants to continue paying taxes on income not received in the hope that distributions will be made at a much later date. No defendant would make any distributions until the charging order is released. The standoff usually ends with the frustrated creditor dropping the charging order (before the tax bills start coming, of course.) This is a good method of protecting your assets.

Once again; a creditor cannot force distribution of the LLC’s assets or income. The power of an LLC is derived from the fact that a creditor can only obtain a charging order against the LLC.

Look back at what happens in an S- or C-corporation involved in a similar lawsuit. If a client’s assets are held in an S- or C-corporation, the judge has a few remedies to satisfy a creditor’s request. First, the court can order the sale of a debtor’s interest in an S- or C-corporation to satisfy the judgment. Second, the court can order the ownership interest of a debtor in an S- or C-corporation transferred to the creditor. Either way, the defendant’s assets in an S- or C-corporation can be reached.

There could be a problem with single-member LLC’s in some states. Although these single-member LLCs have been used for some time now, it is wise to have another person as a 5% owner of an LLC. This setup prevents a creditor from arguing that an LLC without more than one owner should not be able to hide itself behind a charging order. If this issue is a concern for protecting your assets in your state, then it is suggested you use an FLP, which does not have the same potential exposure, or use an LLC, where the state statute dictates the charging order as the sole remedy for the creditor.

It should be noted that many types of assets, beyond financial accounts, can be held in LLCs. A good candidate is real estate (typically rental or vacation property). Other libelous assets are the vehicles whose involvement in an accident could create liability for other client assets. For example, a boat worth as little as $10,000 could result in massive costs to the rest of the estate if the owner of the boat drinks, drives and then injures another boater or swimmer. Almost any vehicle can be put into an LLC, including cars, boats, airplanes, jet skis, and snowmobiles. The decision to put any of these in an LLC is a matter of how much money the client wants to spend on protecting his assets and the value of the assets. Typically, each LLC costs between $1,500 and $2,500 to establish. It is recommended using separate LLCs for assets with significant value.

Everyone should be able to achieve asset protection goals domestically by setting up LLCs. However, for some people, adding offshore planning does add an extra layer of protection. Nevertheless, it should be understood that offshore planning will cost more money and add a level of complexity. However a properly implemented offshore plan should be able to be explained in simple and easy to understand terms.

A word of caution is that you should not consider these types of trusts because you heard from a friend or read somewhere that offshore asset protection is the way to go. Another misnomer is that you can move assets in order to save on or avoid federal income tax. This is simply not true. There are asset protection wizards employing offshore asset protection trusts as their main tool. This is generally a one size fits all practitioner and you should be very cautious. These asset protection practitioners have been know to use offshore trusts when their client commits fraud by moving his or her assets offshore. Their claim is a U.S. court will not be able to gain control of the money; therefore, all assets will be safe from all creditors. Again, this is simply not true.

It should be noted that, when an offshore plan is properly implemented well in advance of any potential creditor attack, the result will be extremely favorable for the client. A person who has $250,000 or more in a brokerage account is getting to the point where the benefits of a properly implemented offshore protection plan would certainly justify the costs.

Asset Protecting
List of Assets You Should Protect

* Family home or condominium;
* Vacation or second homes;
* Rental property;
* IRAs;
* Stocks and mutual funds;
* Life insurance;
* Bank accounts and CDs;
* Cars, boats, planes;
* Wave runners or motorcycles;
* Business entities (especially S- or C-corporation stock);
* Valuable collectible items;
* Other personal real property of financial value;
* Future inheritance for family; and
* Accounts receivable in a physician’s medical practice.

In general, asset protection is about putting up as many barriers as possible in front of creditors to make it more difficult for them to get to these personal assets. Asset protecting is not about hiding or concealing those assets or about committing fraud to conceal assets from creditors. Good asset protection discourages lawsuits to the point where a client can bluntly state to a personal injury attorney that millions of dollars in assets are legally protected and, if the client is sued, completely out of reach due to asset protecting.

Transferring Assets to Your Spouse
An article that was recently written by an Asset Protection foundation has warned lawsuit-prone professionals (especially doctors), not to transfer their homes and other personal assets into their spouses’ names in order to protect themselves from lawsuits. The article strongly stated that not only does this kind of strategy fail to provide protection from lawsuits, but it can even be the basis for fraud if it is not done according to specific guidelines.

This warning came as legal consultants throughout the U.S. reported the continuing misconception, especially in the medical community, that transferring assets in the name of the less-vulnerable spouse is an effective asset protection strategy. Estate planners have estimated that 20 – 30% of the nation’s medical doctors have engaged in this practice.

One asset protection specialist said that he blamed “the nation’s lawyers who often give this advice without understanding its implications.” He cited both the Uniform Fraudulent Transfers and Uniform Fraudulent Conveyances Acts, which state that courts can consider family relationships in lawsuit proceedings. These statutes explicitly says that transferring family assets to immediate family members is considered to be fraudulent if it is done as a reaction to a lawsuit. Even if the transfer is done before a lawsuit, the courts may find the arrangement as an implicit attempt to defraud creditors.

The secondary reason for this warning included complicated divorce proceedings, increased estate and property tax liabilities, and the possibility of non-physician spouses being sued independently.

The states of Texas, Florida, Kansas, Iowa, Oklahoma and South Dakota have universal Homestead Exemption laws protecting homeowners’ residences from being seized in lawsuits. However, Homestead Exemption laws in 39 other states are said to be woefully inadequate for 21st Century housing prices, with the majority protecting between $10-50,000 of equity in a homeowner’s primary residence.

It’s recommended that professionals who may be at risk of losing their homes in medical/dental malpractice lawsuits consider alternative forms of titling their assets, including Limited Liability Companies, Family Limited Partnerships and Trusts.

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