Asset protection strategies are often presented as a means of placing an individual’s cash and property beyond the reach of creditors. But, how effective are these strategies? Consider the following…
What is asset protection?
“Asset protection” typically refers to erecting barriers between one’s assets and one’s creditors. Some protections are well established under traditional law—for example, marital property may be protected from certain creditor claims under homestead and ownership by entirety laws, and retirement assets held in qualified plans are usually exempt from attachment by creditors. Similarly, conducting business through certain corporate entities generally shields the business owner’s personal assets from debts and obligations that arise in the course of doing business. However, more aggressive asset protection strategies often use (1) trusts to transfer, but retain the benefit of, personal assets, (2) pass-through entities (e.g., limited liability companies) to limit a creditor’s ability to take control of the entity, and (3) multiple entities (e.g., holding companies, parent-subsidiary structures, or other affiliate relationships) to create layers of “corporate liability shields.” Very sophisticated strategies utilize “off shore” (i.e., foreign) trusts and entities, as well.
Does asset protection work?
All liability protection vehicles are subject to statutory, regulatory and common law exceptions. Courts have ample power to disregard asset protection structures and allow creditors to reach an individual debtor’s assets—particularly in cases where there are indications of intent to defraud creditors. In short, good faith use of traditional and well-recognized liability protection vehicles is unlikely to face serious legal challenge, but aggressive asset protection strategies that have little purpose other than shielding assets may face greater legal scrutiny.
A well-structured asset protection plan may go a long way to preserving one’s wealth, but one should not assume that any asset protection vehicle or plan is entirely “bulletproof.” Please feel free to contact me if you have any questions regarding liability protection.
PLEASE NOTE: This blog is merely for the general interest of the reader. It is not legal advice or opinion and it does not create an attorney-client relationship. Please call me at 973-921-0600 if you’d like to have a free initial telephone consultation or learn more about me or my practice. Thank you.