Asset Protection Law Journal : Asset Protection Lawyer & Attorney : Kenneth J. Laino : Schneider Smeltz Ranney & LaFond Law Firm : Trusts, Estate 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.

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A couple recent inquiries from readers of this blog (as well as some recent client questions) reminded me of the critical role of the attorney in the asset protection planning process.

You will frequently benefit by getting input from multiple advisors -- such as your investment advisor, accountant, tax preparer, maybe even certain friends and family members.  Only an attorney, however, should ultimately render asset protection advice.  This is because once you have retained an attorney, your discussions with the attorney will be privileged.  The attorney-client privilege is a very strong one and is designed to facilitate open and honest discussions between you and your lawyer.  Correspondence and discussions with your investment advisor and most other professionals will generally not be privileged.  A reputable asset protection attorney will obviously not tolerate discussion about improper or unlawful activities.  It is nevertheless extremely important that you be able to speak freely and openly with your attorney about your particular situation and goals.  Again, input from other advisors is desirable.  But engaging in asset protection planning without the benefit of a trusted attorney is a big mistake.

Another reason that an attorney is so critical to the asset protection process is that only an attorney can lawfully draft certain documents.  For instance, while a financial advisor may have good advice with respect to certain provisions of a will or trust agreement, your financial advisor is not supposed to be drafting those documents.  In fact, that kind of drafting may constitute unauthorized practice of law.  Even putting aside the possible illegality of such action, it just does not make any sense.  I have had a couple instances recently in which I was presented with trust agreement provisions that had been prepared without the help of an attorney.  The poor drafting lead to all kinds of problems.

The failure of many individuals and organizations to engage in asset protection planning costs far more in the long run than the planning itself would have cost.  A team approach to asset protection planning is frequently advisable as long as a lawyer is a key team member.  Asset protection planning without the help of an attorney, however, is likely to be an accident waiting to happen.

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I am frequently asked isolated questions about asset protection planning.  Should I consider forming a domestic asset protection trust?  Do you think I should consolidate some of my real estate holdings in a limited liability company?  Should my husband and I transfer joint interest in our residence to my name alone?  Etc., etc.

None of these questions can be answered in isolation.  They are like pieces of a puzzle that must ultimately be brought together in an overall asset protection strategy.

In order to give meaningful advice, an asset protection attorney must obtain information from you about a variety of matters, including the following:

• Your net worth.  While certainly not determinative, net worth affects asset protection planning.  If your net worth is $200,000, an offshore trust is far less likely to be a meaningful strategy than if your net worth is $20 million.
• Your specific assets and liabilities.  Protecting real estate may involve different considerations than sheltering marketable securities.  Your attorney must have at least a general idea of your specific holdings.
• Risk.  Are you in an occupation where you face an increased chance of lawsuits (such as a medical doctor or a small business owner)?  While any individual of a business can potentially benefit from asset protection planning, some businesses and individuals need planning more than others.
• Fees and expenses.  Various asset protection alternatives have different costs.  Offshore trusts are a lot more expensive to set up and maintain than most domestic asset protection alternatives.  And more expensive alternatives are not always the best choice. 
• Family situation.  Your marital status, whether or not you have any children, and other personal and family considerations can impact asset protection alternatives.
• The area in which you live.  Florida and Texas have great homestead exemptions.  Ohio on the other hand has a very low homestead exemption.  State laws definitely impact asset protection planning.
• Whether you have any current creditor problems.  Once there is a judgment against you, or even a lawsuit filed against you, your alternatives become far more limited.  Fraudulent transfer statutes may prohibit moving assets to avoid paying known creditor claims.

While much of the foregoing may seem obvious, I find that many clients do not initially understand why I want to have a good overview of their personal and financial situation before making any specific asset protection recommendations.  Various asset protection alternatives are like pieces of a puzzle -- they must fit together into an overall strategy in order to be effective.

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Whether you are a physician in private practice or working for a hospital or other health care organization, you should consider some basic steps to protect your assets.  Here are a few suggestions:

1. Maximize contributions to IRA's and other qualified plans.  Assets in IRA's and qualified employee benefit plans are generally awarded special protection from creditors.  Many plans (including 401(k)'s) are also protected in bankruptcy because they are not considered part of a bankruptcy estate.  The Bankruptcy Abuse and Protection Act of 2005 limits the IRA exemption in bankruptcy to $1,000,000 adjusted for inflation.
2. Consider some life insurance strategies.  In many states death benefits from life insurance, as well as the cash value of a life insurance policy, are exempt in whole or in part from claims of creditors of the insured.  In Ohio, for example, under Ohio Revised Code Section 3911.10, insurance death proceeds are exempt by statute if paid to the spouse, children or certain other designated beneficiaries.
3. Consider various trust arrangements.  Not all trusts provide asset protection, but some do.  For example, irrevocable life insurance trusts (ILITs) can be a great estate planning tool and can also provide significant asset protection.  If the ILIT is formed properly creditors of both the person who set up the ILIT and the beneficiary should have no rights in either the cash value or the death benefits of the insurance. 
4. Split assets between spouses.  Simply dividing assets between spouses may offer some protection.  As I have explained in another post, holding property as joint tenants is generally not the best strategy from an asset protection standpoint.
5. Focus on your principal residence.  Some states (Florida and Texas in particular) provide special protection for your principal residence against claims of creditors.  Ohio, however, provides a so-called homestead exemption of only $20,200 pursuant to Ohio Revised Code Section 2329.66.  Strategies for protecting your home from creditor claims therefore vary from state to state.

Many of these considerations are applicable to anyone who has accumulated assets that are worth protecting.  Since physicians (especially those in certain specialties) are far more at risk than many other people, they generally have a greater need to focus on asset protection.

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A couple weeks ago I posted some general observations about asset protection planning for physicians.  While a doctor should be taking steps to protect his or her own personal assets, physicians in a private medical practice should be taking additional steps to protect the private practice itself.  Here are some items worth thinking about:

     1. Consider using multiple entities to reduce liability and possibly gain some tax benefits.

·       Use one entity for the medical practice itself.

·       Use a separate entity to hold real estate and then lease the real estate to the practice group.

·       Use another entity to hold and lease medical equipment to the practice group.

·       Depending on the size of the practice, a management holding company might be advisable in connection with the various entities.

·       Patents and any other intellectual property should also never be owned directly by the medical practice.

·       Separate entities should generally be limited liability companies because they generally provide the best asset protection and they provide flow-through tax treatment.

Formation of additional entities can obviously involve start up costs, as well as some additional costs for on-going operations. The size of a medical practice (both in terms of the number of physicians and in terms of revenue) will influence how many separate entities may be appropriate.

     2. Consider different alternatives with respect to your accounts receivable.  

·       Some private medical practices (and other health care organizations) use a separate billing company. 

·       It is sometimes advisable to pledge accounts receivable in connection with a bank loan, since a judgment creditor will be in a second (and less appealing) position to the bank.

     3.  Make sure that an agreement is in place among members of the medical group covering what happens if a physician dies, becomes disabled, retires, or otherwise leaves the practice. Despite all the concerns about malpractice liability, more physician groups experience problems in this area than with a malpractice claim that exceeds insurance limits.

All of the foregoing are of course just general observations. Each situation must be analyzed on its own. But in any event, a medical practice should periodically review its structure and operations from an asset protection standpoint.

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There are many asset protection strategies, and the more expensive and complex ones are not always the best.  I like the comment made by Jay Adkisson (a nationally recognized asset protection planner) in the May 11, 2009 issue of Forbes Magazine.  He basically says the best ways are the old ways.

While that is a big generalization, there is a lot of truth in it.  Offshore trusts, so called "domestic asset protection trusts" (permitted by statute in states like Alaska and Nevada) and other more exotic asset protection techniques may all have their place --  given the right circumstances.  But for most executives, small business owners, physicians, and others in need of asset protection, more traditional devices should be considered first.  Simply dividing certain assets between spouses may be helpful.  Many  traditional trust arrangements, including an irrevocable life insurance trust (ILIT), can often provide significant protection.  So can one or more limited liability companies.  They are easy to set up and provide excellent protection when properly utilized.   Using a family limited liability company in conjunction with a revocable trust can be a relatively inexpensive way to protect assets, and potentially provide significant estate tax savings.

I advise clients to focus initially on traditional, relatively less expensive asset protection strategies.  If those appear inadequate, then consider other alternatives.  But do not start with the assumption that you need an offshore trust in order to reasonably protect your assets.  Many more ordinary arrangements may provide all the protection you reasonably need -- without many of the drawbacks of more complex arrangements.

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