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Asset Protection Planning

As is true of any kind of estate planning, Asset Protection Planning must be done cautiously and only with good legal counselling and advice. So often people think that a document—trust, partnership agreement, etc.—is going to provide them certain benefits like asset protection. But accomplishing any worthwhile goals is a much more complex problem than preparing a document. In our experience, the majority of plans fail to achieve their goals unless the client has a comfortable working relationship with legal counsel, such as through our LifeSpan Three Step Strategy™.

There are six general levels of asset protection, any of which must be implemented, for practical purposes, before there is any threat on the horizon, that is, before any liability-creating event (accident, professional error, injury, etc.) occurs. As you consider options that might be appropriate for you, thoughtfully look very long term because when asset protection strategies are implemented you set property ownership issues in motion which cannot be easily changed, if at all.

  1. Liability Insurance. Purchase as much liability insurance coverage as you can get or afford. This is the first level of asset protection and is usually very inexpensive for what you receive. Exceptions: high-risk professionals (especially medical) may incur very high cost to obtain this kind of protection.
  2. Giving assets away. This can take a variety of forms but would usually involve gifts to spouse, gifts to children, or gifts in trusts for spouse and/or children. Gifts made any way other than in trust expose the assets to liability risks of the donee, which may exceed the liability risks of the donor. Further, the donor must give up any control or access to the assets. In a sense, to “protect” the asset from risk of loss, you lose the asset—this technique gives up the most control.
  3. Positioning assets to limit risk. This involves looking at all assets under the client’s control and re-titling unprotected assets in other names, where prudent to limit risk. For example, ERISA plans are safer than life insurance, which is safer than a primary residence, which is safer than non-qualified investments. Separate living trusts for married couples help allocate the risks. We position the assets with most exposure under ownership of family members or entities with less risk. Rental real estate, for instance, might be placed inside of a corporation or LLC to isolate the risk and asset from the rest of your estate.
  4. Domestic Asset Protection – Stage One. This stage of asset protection involves forming and funding one or more limited liability companies. Assets to be protected are placed inside the LLC. Ownership should be shared among family members. (Wyoming Close LLCs may be the best choice of LLCs. The June’04 issue of Blumberg’s Wealth Manager magazine rated Wyoming as the #1 friendliest state in the nation to wealthy people.) The LLC can protect the assets owned by it, but a Charging Order (the sole and exclusive remedy under Wyoming law) might allow a creditor access to the income.
  5. Domestic Asset Protection – Stage Two. This second stage of domestic asset protection raises the degree of safety. The main problem with Stage One planning is that a Charging Order could give a creditor access to income generated by the LLC. There are some defensive strategies to protect the income stream, but still, a creditor has a shot at the income under the Charging Order. Under Stage Two planning, the income, if distributed, would be distributed to an Asset Protection Trust; thus protecting the income as well as the actual assets owned by the LLC. (States with appropriate trust laws include Delaware, Alaska, Missouri and Nevada.)
  6. Offshore Asset Protection Planning. The final and ultimate level of asset protection planning is to do it offshore. This involves integrated use of various trusts, limited partnerships and other estate planning tools.

We cannot stress this enough: any asset protection planning must be part of an overall estate planning strategy. You cannot achieve satisfying results by doing this “piecemeal.”