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“Asset protection” might not be a phrase with which you are familiar. However, most people engage in asset protection to some degree every day to minimize their risk exposure. For example, if you have a home or automobile, you likely have liability insurance to shield your property from creditors or a lawsuit. But while insurance is the most basic form of asset protection, there are also many other ways to safeguard your assets.
Assets protection refers to implementing strategies and using techniques to shield one’s assets from the claims of creditors or a civil money judgment. It can range from basic forms of insurance to extremely complex plans that utilize a web of entities and trusts spanning various jurisdictions.
Taking the appropriate legal steps to protect assets is crucial for both business entities and individuals. While individuals may face situations such as debt, divorce, accidents, and foreclosure, business owners and entrepreneurs can experience a wide variety of lawsuits related to employment and the workplace.
Ensuring you have an appropriate amount of insurance for the types of activities in which you regularly engage is the simplest thing you can do to protect your assets. Home and auto insurance are essential — and if you are a professional, you can purchase an insurance policy for malpractice issues. Once you achieve a certain level of wealth, an umbrella policy that provides additional liability coverage might also be a good idea.
It’s crucial to have insurance, even if more complex strategies are also used to protect your assets. However, because insurance does not offer protection from every type of claim or liability, other techniques should be used in conjunction with insurance for more comprehensive coverage.
Some assets are automatically protected by the law from creditors. For instance, a retirement plan that falls under the purview of ERISA cannot be seized by creditors. In some states, the primary residence is exempt from creditors regardless of the value. In others, a specific dollar amount of equity in the residence is protected. Critically, as of 2021, California protects between $300,000 to $600,000 of home equity, depending on the county and the average home value.
Certain states also protect annuity contracts or the cash value of life insurance policies up to a particular limit. Significantly, to the extent that you can transfer your non-exempt assets — such as cash savings — to exempt assets like protected retirement plans, you are safeguarding them from creditors.
Using business entities provides another level of assets protection for entrepreneurs. This strategy is meant to isolate your business activities from your personal assets. Corporations were first used to shield shareholders’ personal assets from liabilities within the business — and they still serve this purpose. There are various entities that individuals can use based on their tax and business needs, including the following:
All of the above structures are subject to having the corporate veil pierced if corporate formalities are not followed. In other words, if someone sets up an LLC to conduct business but pays their personal expenses from the business bank account, a court may determine that the LLC has not been used as the law intended — and allow a creditor to “pierce the corporate veil.” This would permit the creditor to access the member’s personal assets.
There are many types of trusts that can be set up to protect your assets. However, it’s critical to consider what the best type of trust is for your specific circumstances. Although a living trust allows you to retain control during your lifetime and can provide your heirs with asset protection — it does not offer protection to the person who created it.
Notably, a living trust does not provide assets protection because (1) the person who sets it up is both trustee and beneficiary so they retain both the legal and beneficial ownership, and (2) the person who set up the trust has the right to revoke and amend the trust in any way at any time. Since you have full ownership and control, creditors can access those assets.
Other types of trusts do not result in retaining full ownership and control. For example, irrevocable trusts can provide asset protection if properly drafted. Because they are irrevocable, once they are set up and funded, they cannot be changed.
Some of the most common types of trusts used for asset protection include spousal lifetime access trusts (SLATs) and international asset protection trusts. SLATs are a type of domestic irrevocable trust in which you make a gift of assets to your spouse. SLATs are popular because they allow for both asset protection planning and estate tax planning. The person gifting the assets also retains “indirect access” since the beneficiary spouse can use assets for the gifting spouse.
International asset protection trusts are the most comprehensive form of asset protection due to the complexity involved concerning a creditor trying to access an offshore trust. With these types of trusts, the settlor sets up and funds the trust. The settlor is also the beneficiary, while a third-party trustee is the legal owner of the assets. But since the trustee is not in the United States — and no U.S. court has jurisdiction over the trustee — a creditor would have to go to the offshore jurisdiction and try their case there. Typically, these jurisdictions have very short statutes of limitations and might bar a creditor from bringing a claim at all.
The form of asset protection appropriate for your situation will depend on a number of factors, including your risk profile, the size of your estate, your liquidity, and your personal risk tolerance. The skilled and experienced attorneys at White and Bright, LLP are committed to providing high-quality legal services and assisting clients with asset protection matters in California. Contact us at (760) 615-3420 for a consultation today.
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