Almost everyone knows someone who had a problem and has lost everything. With our litigious society, with limited risk for those making liability claims, asset protection planning has become required for many and highly desirable for many more. Lawsuits can, for example, allege professional liability, responsibility for a car accident, or unpaid creditors. Whether legitimate or not, the defense can be enormously costly.
Today, we will introduce asset protection planning (what it is, types of risk, when to plan, what to expect in the planning process, and levels of planning) and how you can get started.
Asset protection planning is not about hiding or concealing assets. It is about using the existing laws appropriately to obtain the best possible level of protection for your assets – in other words, to make you a less desirable target for claimants.
Physicians, dentists, other health care professionals, lawyers, accountants, and sometimes people whose business enterprises pertain to health care, such as skilled nursing facilities and assisted living facilities, are frequent targets for claims. Those in construction (architects, builders, developers) also have professional liability concerns.
As a general rule, nobody can limit their own professional liability through a legal device. That’s why professionals carry malpractice insurance. But there are other areas of risk against which professionals can and should protect themselves.
Verbal partnerships are always general partnerships. Each partner is liable for all claims arising from partnership activities in a general partnership. Only in a limited partnership can the partners be protected from liability for the malpractice of the other partners. Protection may also be needed against a partner’s next spouse becoming an owner in a multi-owner entity where an owner is married.
These include liabilities for business deals (for example, real estate) that have gone bad and tort claims (such as car wrecks). In any business, nonprofessional liability claims could be based on employment practices, alleged employment discrimination, and alleged sexual harassment, to name a few.
Professionals and nonprofessionals alike are exposed to general liabilities that can cause their assets to be at risk. These include liability for unpaid income and estate taxes; the behavior of children and their spouses, which can lead to loss of family assets; co-signing a loan or mortgage with a relative or another who defaults or has a judgment filed against them; or a car wreck or other accident.
The best time to plan is before a claim arises. Different rules apply for known claimants and unknown future claimants. But even with an existing claim, and sometimes even after a judge enters a decision, some options may still be available. It is, however, vital to avoid making a “fraudulent” transfer, i.e., a transfer of assets with intent to defraud or hinder creditors made without complete and adequate consideration.
Because asset protection planning can include a variety of strategies, it is usually best accomplished by a team of advisors, including a CPA, estate planning attorney, financial advisor, insurance advisor, and possibly retirement plan administrator. Any member of this advisor team may recognize that you need asset protection planning and recommend an evaluation, or you may have concerns you would like to address. Generally, the process takes at least three meetings to plan and implement. They are:
1. An Initial Meeting: During the first meeting, we will gather basic financial information, determine your objectives, and establish a relationship with you. We will also set some reasonable expectations for how asset protection planning works, including how the laws work and what you can expect.
You must be honest and forthright in providing the information requested. At the same time, because the very nature of asset protection planning can involve current worry about potential risk and litigation, it is vital to determine early how much information you are willing to share with various members of your advisory team. For example, preserving attorney/client privilege may be crucial and not sharing litigious information with non-attorney advisors who could be subpoenaed later.
2. An Advisors Meeting: After the initial meeting, the advisor team will usually meet without you to review your objectives, discuss various legal and financial solutions, and determine a consensus solution.
3. A Solution Meeting: The advisor team will present a unified solution plan to you, including all legal and financial components. Because many of us live into our 90s, your strategy should be flexible enough to accommodate changes over 20 or more years.
* Many people would like to have a high degree of certainty about the outcome of asset protection planning. Still, there may be circumstances that neither your advisors nor you can effectively control. Even so, the result should be considerably better than if you had done no planning at all.
* Many people want to maintain control rather than shift assets to some unknown third party in a foreign land. The preferred approach is to maintain control or oversight of your assets.
* You want a plan that will discourage lawsuits from the outset. Your advisors cannot make your assets appear not to exist, but they can create a structure that will make it much less attractive for a potential plaintiff to go after you than after someone who has done no planning.
* You want to avoid liability traps of owning assets in general partnerships or in joint ownership where the assets are at risk of problems another owner may have.
Once you approve the plan, your advisors will list the assets and determine where they must go. It can easily take six months to a year to fully fund the plan, usually done in steps and pieces. During this time, everyone must stay informed about the process.
You can employ numerous asset protection strategies, from very basic to advanced, depending upon the particular risks you face, your current situation, and the extent to which you are willing and able to protect your assets. Asset protection begins with utilizing state and federal law exemptions for life insurance, retirement plans, and limited types of jointly owned property. However, these exemptions have limited effectiveness because they only protect these specific types of assets. More advanced strategies like business entities and trusts specifically designed to protect you against future creditors may be in order for those needing broader protections.
Planning Tip: Asset protection planning is a complex area, and as you become familiar with these tools, you will begin to understand why you need a team of advisors to accomplish your goals.
If you are concerned about protecting your assets, talk to us. We can help you evaluate your situation, assemble a team of advisors, and start implementing a plan. Most asset protection plans will build on top of your existing estate planning.
Remember, the best time to plan is before a claim arises.
(By Appointment Only)
14425 Falcon Head Blvd
Bldg E-100
Austin, TX 78738
