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Asset Protection

Asset Protection Planning is a science and as in all areas of science, there are ethical issues.

Science – any systematic knowledge or practice

Ethics – a set of principles or moral conduct

The roots of Asset Protection are founded in debtor-creditor law. The goal is to remove the assets from the legal title and ownership of the debtor while the debtor retains control and beneficial enjoyment of the assets. An Asset Protection Plan should change the financial face of the client so that creditors have a much more difficult time attaching and seizing the assets, making negotiations favorable to the debtor. A properly constructed asset protection plan also allows the debtor to answer honestly in the face of a judge in court.

The goal is not to avoid debts; the goal is to control debts and settlements. The word debtor may scare you or bring negative connotations at this time because your debts are currently paid. Not only is this understood, but also, it is the most beneficial time to protect your assets. The word debtor refers a person in a in a “post” state of affairs as the accused or judged; in your current state you may have no creditors. However, there are “assumable risks” that you take for granted.

Ownership and Control – Learning to Separate

An American legend and tycoon of the 1930’s and ’40’s, John D. Rockefeller, believed that you should minimize your risk by owning nothing, but controlling everything. This American icon set a standard for preserving wealth and protecting assets. Over the years, a field of law emerged mainstreaming its way into debtor-creditor courts and establishing a basis in Statutory Law.

Literally, thousands of techniques have evolved for separating ownership (or title) from control and beneficial enjoyment. Every asset had a best way for protection depending on the type of asset, the financial control over the asset and the situation of the owner of the asset. The possibility of a creditor attacking the asset depends on the availability and ease necessary for the seizure and the aggressiveness and intelligence of the creditor.

Protecting assets falls into general philosophies. These include transferring ownership by way of person or trust, encumbering the property financially, and recording a naked deed of trust, selling assets under long-term contract. The objective is to choose real protection rather than to set up a smoke screen.

Assets must be protected before there are any claims by creditors otherwise the creditor may claim a fraudulent transfer of assets.

What is an Asset Protection Plan?

Every plan is different, but every plan must fit within the statutory framework and within the assets and their needs. First, the planner must identify and quantify the risk of the client. Then the planner must analyze the asset and the structures available for that asset. The planner should take great care in the profile of future and potential creditors. The more sophisticated the creditor the more encumbrances over the assets should be in place.

Transferring any asset falls under the laws and the tax issues of the jurisdictions involved. A fraudulent transfer is a dream come true for a creditor and may give them automatic domain over the asset and the legal right to pursue the transferred assets. This is why we say that the assets should be protected when the seas are calm.

Very few of us would hesitate at arranging our affairs to pay less income tax. The majority of people think it moral to try to reduce estate and inheritance taxes. It is legal to reduce taxes without committing fraud or tax evasion. In law, obligation is defined by “duty” and “Duty of Care”; it means what you owe by specific circumstances.

Then what Duty of Care does a person owe an injured party? There is a famous saying by lawyers in answering this question, “that depends.” Herein is the answer to the question. “Is it ethical to do asset protection planning?”

Should you become the injured party, you will be subject to the ethics of others and will have no control over the outcome or the consequences you will suffer. One could argue that the party who is right will prevail. There are no guarantees and there is no magic wand.

Your solution could be a combination of asset protection trusts, family limited partnerships, insurance, LLCs, or many other various tools in the toolbox. Be aware that the toolbox is filled with many options when the financial seas are calm and that once your assets are financially challenged or in duress, these options become limited.