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Asset Protection

Friday, January 27, 2012

Tax & Estate Planning Tip #6: Asset Protection Planning

We face potential liability every day – whenever we get behind the wheel of a car, sign a contract, buy, sell, or rent real estate, sell a product or service, hire a contractor, fire an employee, or babysit a neighbor’s child.

Some assets are exempt from creditor claims by law (e.g., social security payments).  Thereafter, our first line of defense is generally insurance, including considerable amounts of umbrella insurance, which you can generally obtain for a just a few hundred dollars per year.

The next layer of protection is to use entities such as corporations, limited liability companies (LLCs), and limited partnerships (LPs).  For instance, a physician may set up a professional corporation (PC) or professional limited liability company (PLLC) to hold minimal assets and then set up one or more LLCs to hold valuable professional business equipment and lease it back to the PC or PLLC.  A real estate investor, on the other hand, may set up family limited partnership (FLP) or family limited liability company (FLLC) to hold rental properties.  This approach isolates liability arising from the rentals inside the FLLC, rather than exposing the investor’s other assets to the claims of renters.

Another layer of protection is to set up a domestic asset protection trust (DAPT) in a jurisdiction which permits them, such as Nevada.  If no claim is made against assets in a Nevada DAPT for two years, they become exempt from creditor claims.

Setting up a foreign asset protection trust (FAPT) is another option.  Offshore asset protection trusts in jurisdictions such as the Cook Islands provide creditor protection as soon as the offshore custodian obtains custody of the assets.  The Cook Islands do not recognize U.S. judgments, forcing a creditor to litigate there - a significant deterrent.

Finally, at your death, you can provide your beneficiaries with the gift of asset protection by drafting provisions into your estate plan to protect their inheritances from divorce, creditors, and predators.  Once they receive the inheritance “in hand” it may be too late.

The best time to undertake asset protection planning is now - before a creditor claim arises.  Otherwise a creditor can attack the asset protection plan, including transfers to family members and business associates, as fraudulent conveyances.

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