An Asset Protection Plan is Different Than an Estate Plan

While estate planning and asset protection planning are related, they are not the same.  An asset protection plan is designed principally to protect your assets from creditors during your lifetime.  It can also be designed to protect assets you leave to your spouse, children and other family members.

An estate plan is focused more on how you want your assets distributed after your death.  Estate planning involves other considerations as well (including Powers of Attorney; Health Care documents; minimizing estate taxes; etc.).  But the central focus of estate planning is distribution of your assets following your death.

Assets can be well protected from creditors but still included in your gross estate for federal estate tax purposes.  For example, funds in your 401(k) account are well protected from creditors.  But these funds will be included in your gross estate for federal estate tax purposes.  The point here is that even though you have an asset protection plan, you may still need an estate plan review, and vice versa. 

Asset protection planning and estate planning are clearly interrelated.  But I have learned that many individuals have a rather sophisticated estate plan (often carefully designed to minimize estate taxes); but that plan may do little or nothing to shield assets from creditors.  Many individuals would benefit from consulting with an asset protection lawyer even if they already have a good estate plan.

What makes a good asset protection attorney?

I recently received an inquiry from someone who will be entering law school in the Fall, and he is interested in becoming an asset protection attorney.  He asked what areas of law he should focus on.

While asset protection law has become somewhat of a specialty, it requires knowledge and experience in at least four areas of law: (i) litigation; (ii) business entities, particularly limited liability companies; (iii) debtor/creditor rights; and (iv) trusts and estates.

Asset protection involves careful judgment about what would ultimately happen in a courtroom under various circumstances.  An attorney who has participated in some trials and who has taken and defended depositions will more likely have a good idea what will happen in a lawsuit brought by one of your creditors.  Experience with limited liability companies, limited partnerships and trusts is also important.

An attorney who went to law school in the Cayman Islands will not necessarily be a very good choice as an asset protection attorney.  A good asset protection lawyer does have to know about domestic and foreign trusts.  But he or she must have a broad enough background in several other areas of law in order to provide meaningful advice about the best ways to protect your assets.

What is Asset Protection Planning?

There is an increasing interest in asset protection among both individuals and businesses.   But many people are still not exactly sure what "asset protection planning" is.

Asset protection planning is simply the process of lawfully protecting your personal and/or business assets from creditors.  It involves taking advantage of laws and legal doctrines that were actually designed to help you protect your assets.

"Asset protection" sometimes has a bad connotation due in part to illegal offshore tax haven schemes and other questionable planning techniques.  Many asset protection strategies, however, are ethical and highly advisable.  An analogy can be drawn to tax planning.  Some schemes that are called "tax planning" are nothing more than illegal and fraudulent evasions of taxes.  Legitimate tax planning, however, is essential for both businesses and individuals.  Similarly, legitimate asset protection planning is important for businesses and individuals, especially in our litigious society.

Asset protection planning makes use of laws that were designed to enable organizations and individuals to protect their assets.  There are numerous asset protection alternatives for individuals, including maximizing contributions to IRA's and qualified retirement plans; using various forms of trusts (including domestic asset protection trusts, irrevocable life insurance trusts, dynasty trusts, and qualified personal residence trusts); retitling various assets; utilizing limited liability companies to protect real estate and other investments; and using life insurance in certain instances.  There are also a variety of strategies for lawfully protecting assets of your business, including using separate entities for certain business functions; using limited liability companies; using insurance as protection; and various other strategies.  There are many alternatives that are perfectly lawful and appropriate.  Fraudulent conveyance statutes and other laws are designed to prevent abuses, but there are a wide variety of asset protection strategies that can generally be employed to protect your personal and/or business assets.  For a more in-depth discussion of asset protection strategies that might be appropriate for you or your business, you can refer to an article I wrote recently that outlines some of the options.

Current economic conditions, recent high profile business failures, the recent waive of foreclosures, rising bankruptcy filings, and the seemingly endless number of lawsuits filed in the United States each year all illustrate the need for reasonable asset protection strategies.  In this environment, businesses and individuals should have no hesitation whatsoever in taking steps to lawfully protect their assets.