Asset Protection planning is wealth insurance. If you are like most of us who have worked hard to be comfortable and acquire some assets you should be concerned with keeping someone else from taking them. The US doesn’t have a “loser pays” legal system. In other developed countries, if the plaintiff loses, the law forces him or her to pay both sides’ legal fees. This expense is a huge deterrent to frivolous lawsuits. In some cases, here in the US, lawyers make their livings by litigating. They often force settlements through legal intimidation tactics. Some never see the inside of a courtroom. So, in this article we will provide you with core asset protection planning information. We will talk about how to protect your assets, about lawsuits, insurance and taxation.
How to Protect Assets
Here are some steps you can take if you need to protect your assets from lawsuits. First, you want to separate your safe assets from your dangerous assets. Cash is a safe asset. Automobiles and real estate are dangerous ones. Then you want to separate your dangerous assets from each other. Say you have four rental homes. Someone falls out of the window of one of your rental homes (like happened to this author). The tenant then sues you for more than your insurance coverage. You don’t want a lawsuit on one property to take all of them. You don’t want that lawsuit to attack you personally. Plus, you don’t want that lawsuit to take that house, itself. So what do you do?
Protecting Real Estate
- For privacy of ownership, put each piece of real estate, including your home, into separate land trust. This way, when someone searches the public records, your name doesn’t appear. To the contingent-fee attorney sniffing around for assets, it makes you look poorer than you really are.
- Make the beneficiary of each land trust a separate limited liability company (LLC). This is for every piece of real estate except your personal residence. A personal home is in a different tax category, so that stays in a land trust only. The LLC provides lawsuit protection for you, personally, when a tenant sues. There are all legal provisions such that when someone sues you personally, the creditor cannot take the company or the assets inside.
- How do you protect your cash?
a. For amounts of $100,000 or less, a limited liability company offers the strongest protection. The jurisdiction with the strongest asset protection is the Caribbean island of Nevis. That is, the Nevis LLC. For more information on the benefits, click the prior link.
b. For amounts of more than $100,000, the offshore asset protection trust is the strongest legal tool. We establish these trusts in the Cook Islands, just south of Hawaii. With the Cook Islands trusts, the trustee is not subject to the court orders of your local judiciary.
- We place automobiles in title holding trusts for privacy of ownership.
- How do you protect the equity in real estate and vehicles? We do this through equity stripping. You know the LLC we talked about above? We use that LLC and place liens or mortgages against the real estate and the vehicles. These are similar to home equity lines of credit. Then, we have institutions offshore that will buy the mortgages for cash and put the proceeds into your offshore trust into a “you can’t touch it” account. Just like before you had the mortgage, you could not get your hands on the cash until you sell or refinance. But you will have a document to show the location of the proceeds of the mortgage.
According to attorney J. Mitten, the average person is subjected to five (5) lawsuits in his/her lifetime, one of which could be a “killer lawsuit”. The United States has 4.4% of the global population, 80% of the world’s lawyers, and 96% of the lawsuits. A person can face losing everything at any given moment.
Lawsuits can arise from the workplace, an auto accident, a customer, a tenant, a disgruntled employee, business partnerships, a spouse or a neighbor. In today’s world it boils down to money. The lawyer on the other side of the table has as much pity on you as a pack of lions does on a baby antelope. You are just his next meal. And a lawsuit is one of the most common ways that wealth gets transferred from one party to another.
Legal Ramp Up
Lawsuits take time and money, even if a party has a solid claim. Pursuing a judgment or settlement is an investment for both the plaintiff and his/her attorney. There is little value in a judgment without the assets or income to satisfy it. Part of the legal ramp-up to a lawsuit is locating the defendant’s wealth.
Utilizing asset protection planning concepts and the proper legal tools can completely remove one’s assets from the radar. With proper planning you can make it nearly impossible or excessively expensive for the other side to pursue your wealth. Your opponent will see that that there is little to no benefit in pursuing a well-protected individual.
Insurance companies are in the business of making money. If they can find a legal loophole or policy exception to get out of paying your claim, they will. Some think that insurance is the first line of defense towards protecting yourself. You, ultimately, hand off your risk to the insuring company, easily done, and sometimes, required by law. There are too many cases where insurance coverage limits didn’t cover the risk that was faced or the total value of a liability claim. The first thing an insurance company does when someone files a claim is to look for a way out of paying. So, get insurance. But don’t depend on it.
Asset Protection and Taxation
An asset protection plan is not a tax savings plan, generally your asset protection vehicles will be tax neutral. There are some cases where your asset protection legal entities will offer some tax benefits, however these benefits are a byproduct of a properly structured legal protection strategy. If you are ever told that you will save money on taxes, eliminate your taxes or are told how to reduce your taxes when protecting your assets, be cautious.
In the shortest definition an asset protection element being tax neutral means that the legal entity is not going to be influenced by tax law. Your tax liability, or what you pay, will not be affected when you place your assets into a legally structured protection plan. You as an individual and U.S. citizen are legally obligated to report and file taxes on worldwide income. Regardless of where your money is, you should be reporting properly to the IRS. Failure to do so will result in fines and criminal charges.
Various states offer special statutes that form part of your overall plan to protect your assets. For example, do you live in a community property state? In other words, does a lawsuit that end in a judgment against you also attach to the assets of your spouse? It depends on the state in which you live. Do you live in one of the few tenancy by the entirety states? Does your state offer a homestead exemption that offers a shield for some or all of the equity of your primary residence? So, know the homestead exemptions by state.
Protecting your assets is an intricate balance of legal, financial and professional tactics that will put your wealth out of reach of a litigious legal system. Using Corporations, LLC’s and other legal entities as well as insurance for business and investments have advantages with tax deductible benefits, but for the most part asset protection and tax savings strategies are mutually exclusive.