Asset protection strategies involve legal tools and financial plans developed to shield valuables from lawsuits. Creating one involves analyzing a list of assets that need protection and determining which legal instrument or strategy would ideally protect each one.
Here we’ll guide you through some asset protection strategy basics and explore which tools work best against different threats:
- Asset Protection Strategy Basics
- 5 of the Best Asset Protection Strategies
- Key Threats to Your Wealth
- The Problem with Hiding Assets
- Your Assets Determine Your Asset Protection Strategy
Asset Protection Strategy Basics
Before we explore specific applications of these strategies, let’s go over some asset protection basics. Asset protection strategies are designed to protect your wealth from a variety of threats, including lawsuits, divorce, malpractice claims, and debts.
To offer the protection you need, professionals known as asset protection planners will use several legal and financial tools: asset protection trusts, LLCs, and land trusts, among others.
Finally, the most important thing to know about these strategies is that you should set one up long before any financial threats are present. The earlier they’re set up, the less likely a lawyer will be able to breach them.
5 of the Best Asset Protection Strategies
Now that you know about the basic strategies for asset protection, let’s dig deeper. Below are five common legal strategies for shielding assets from lawsuits.
1. LLCs
Limited liability companies (LLCs) are one of the most widely used asset protection strategies for businesses and individuals. LLC statutes include provisions that keep a creditor from taking the company or its assets when they sue an LLC member.
To get around the protection offered by an LLC, your creditor might try to win a charging order. This order says that the creditor has the right to distributions paid out of the LLC. However, you still win even if a creditor gets a charging order, as you cannot be forced to make such payments. Plus, whoever has the right to the distributions is responsible for the taxes, whether they are paid out or not. That means you stick your creditor with a tax bill instead of an asset.
If you plan to establish an LLC domestically, Wyoming, Nevada, Delaware, and South Dakota have the most protective domestic statutes. Should you want the strongest protection from creditors possible, though, set up your LLC in the Caribbean island of Nevis or the Cook Islands in the South Pacific. Both jurisdictions possesses potent laws to shield company holdings.
2. Asset Protection Trusts
Asset protection trusts, specifically those formed offshore, are considered the most powerful tool to protect money from lawsuits. How do they work? Local courts do not have jurisdiction over foreign trustees. When a creditor takes a signed court order to a foreign trustee, that trustee will ignore the order and tell the creditor to retry the case.
There are domestic asset protection trust options, but the case law on those is shakier. We’ve seen them penetrated over and over again by results-oriented judges. So, the strongest legal statutes are in the Cook Islands, Belize and Nevis. In fact, the offshore trust is one of the few asset protection strategies that works after a lawsuit is filed.
To provide even better asset protection, an LLC can be placed within an offshore trust. That LLC is then made to hold the bank account used to fund the trust. This strategy allows you to serve as the LLC manager and account signatory until you need our international trustee company / law firm to step in and protect you.
Here’s an example of how this strategy works: Suppose a judge orders you to turn over your money. Our offshore law firm is not under your judge’s jurisdiction. So, our law firm can legally refuse to comply. This strategy works best for liquid assets you hold safely in an international institution.
3. Avoiding Ownership
People who are savvy about asset protection will do everything in their power to limit what they legally own. That doesn’t mean they have no wealth or assets; it just means that what they do have cannot be connected to them personally through legal channels.
You might be asking why someone would avoid ownership. Because the first thing a contingent-fee attorney does when thinking about suing you is conduct an asset search.
Own a car? Why not own it in a title-holding trust to keep your name out of the public records?
Own or might own a rental property? Why not hold it in a land trust for privacy of ownership? Then you can make an LLC the trust beneficiary for lawsuit protection and asset protection.
Have a sizable investment account that you hold in your own name? An opposing attorney will view you as an easy target.
When you hold your wealth in a proper asset protection trust, you have access, but your opponent does not. Moreover, when you pass away, your trust names your heirs as trust beneficiaries.
4. Separating Assets
Another key asset protection strategy is to separate your assets into different legal tools. That way, if one of your assets is jeopardized, the others remain safe. For instance, we recommend not owning investment real estate in your name because when someone sues you, you could potentially lose everything. Holding real estate in an LLC is generally a good idea. However, if there is a tragic accident that surpasses your insurance coverage, the liability could jeopardize other assets held by that LLC. If you place each property in its own company, you isolate your liability to one property at a time.
5. Keeping Wealth Private
What’s better: looking rich or being rich? To us, being rich is the obvious answer.
It may feel good to have your neighbors know you are doing well. But ostentatious displays of wealth breed more jealousy than admiration. Flash your cash, and you might as well wear a big neon “Sue Me” sign around your neck.
Keeping your assets private through the use of land trusts, asset protection trusts, and LLCs is your best bet. This way, you can prevent lawsuits from starting and stay protected on the off-chance someone notices your real net worth.
Key Threats to Your Wealth
Lawsuits are the primary threats to any wealthy individual, but there are two particularly dangerous legal threats: divorce and professional liability. Here’s how they affect your asset protection strategy:
Professional Liability
Your profession can determine your level of risk and the type of asset protection strategies you need to employ. If you are a physician, an attorney, an accountant, or a real estate industry professional, you need more asset protection measures than a typical desk employee. Speaking of employees, no matter what profession you are in, if you have employees, you have liability. We have spoken with business people who have been falsely accused of discrimination, sexual harassment, and wrongful termination. Others have experienced tragedies where an employee injured another person in a car accident or equipment mishap, and the liability worked its way back to the business owner.
Divorce
If your marriage ends, an expensive divorce could cut your assets in half or worse. One of our employees, who’s an attorney, had this happen to him in a divorce. Before he joined us, the judge gave his ex-wife everything. Not half. Everything. The judge said, “You’re an attorney. You can earn it all back.” Judges don’t always follow the law. So, a solid asset protection strategy is necessary to protect yourself from such a life-disrupting scenario.
The Problem with Hiding Assets
Can you hide assets?There are some ways you can make it very difficult for all but the most determined creditor to find out what you have. The important thing to know, though, is that hiding is nice, but protecting is better. A thorough deposition can uncover most hidden assets, and while most lawyers aren’t motivated enough to go that far, some are. If you protect your assets, rather than obscure them from prying eyes, they’ll remain safe even if someone discovers them.
Your Assets Determine Your Asset Protection Strategy
What you want to protect will determine which legal tools you need to use. It will also tell us whether you need a domestic or offshore asset protection strategy.
Where you live will also make a difference in how your strategy is crafted. For example, people who just want to protect their home in Florida don’t need a specialized tool, since the state offers 100% homestead protection for primary residences. Conversely, someone living in California will need a method to protect their home, since the state offers a small homestead exemption that rarely covers the full value of a California residence. In short, the amount of protection you need is going to be customized to your exact situation.
Defend Your Assets with Help from Asset Protection Planners
Knowing the best asset protection strategies is useful, but you need to set up the proper legal tools and vehicles to gain real protection. If you want financial security from the legal predators out there, Asset Protection Planners is ready to help. Fill out the form at the bottom of this page to schedule your free consultation.
Asset Protection Strategies Frequently Asked Question
How can a trust be used as an asset protection strategy?
An asset protection trust, established properly in the right jurisdiction, can be a powerful asset protection tool for someone looking to shield their wealth from creditors and frivolous lawsuits. When drafted correctly by a professional, certain asset protection trusts are nearly impenetrable. Case law indicates that the most powerful asset protection trusts worldwide are in the Cook Islands, Belize, and Nevis. To help you better understand how trusts can protect your wealth, we’ve outlined how they work and their basic benefits, including:
- Protection from creditors
- Estate planning advantages
- Privacy
- Ability to bypass probate
- Flexibility across multiple jurisdictions
A trust is a legal arrangement between three main parties:
- A trustee who manages the trust
- One or more beneficiaries who benefit from the trust
- The settlor who establishes the trust
If you are creating an asset protection trust, the trustee company that manages the trust is generally an unrelated third-party. That is, the person or people in control or those in charge of the trustee company are not relatives, controlled employees, or agents of the settlor or beneficiary(ies). Otherwise, the courts consider the trustee the alter ego of the settlor.
Once a trust is established and the assets are transferred to the trustee, your assets are legally separated from you. Thus, creditors cannot easily access them. That is why many wealthy individuals rely on trusts to secure their assets against lawsuits.
Protecting assets from creditors isn’t the only way that trusts help secure your wealth. High-net-worth individuals often use trusts to manage and preserve wealth across generations, employing strategies such as spendthrift provisions. This provision prevents beneficiaries from using up their inheritances by limiting the rate at which they can access trust-held funds. (We call these “spendthrift” provisions.) Furthermore, trusts can be designed to adapt to changes in circumstances, such as shifts in family dynamics.
Privacy is another significant advantage of using trusts. Public asset ownership records can expose your wealth to unnecessary scrutiny and attract frivolous lawsuits and unwanted attention. This is a commonly seen disadvantage of a will. Most trusts, on the other hand, have built-in privacy measures that maintain the confidentiality of your assets, reducing your risk of additional litigation.
Another critical aspect of a trust is its ability to bypass probate. Probate is a public, court-supervised process that can expose assets to claims from creditors during estate settlements. In contrast, assets held within a trust generally transfer directly to the beneficiaries upon the settlor’s death. Thus, assets can remain private and protected from creditor claims. This saves time and legal fees, and helps ensure the security of the inheritance.
Trusts can also serve as effective tools for those with assets or business interests across multiple jurisdictions. When your trust has been properly set up by a professional, it allows you to leverage favorable trust laws that protect your assets from creditors in other countries. This makes trusts a versatile instrument for global estate planning.
While the benefits of using trusts as part of your asset protection plan are numerous, it is crucial to have the trust properly established and managed. Without a professional by your side, you run the risk of setting up the trust in a way that does not provide court-tested legal protection. Should this happen, a dedicated creditor could gain access to your assets.
Working with a knowledgeable professional, like those at Asset Protection Planners, helps ensure that your trust is compliant with all relevant laws and maximizes its protective features. Professional, expert guidance is essential for avoiding common pitfalls and ensuring that the trust serves its intended purpose.
