There are many factors to consider in deciding whether a particular jurisdiction is or is not favorable from an asset protection standpoint.  Certain states and foreign countries are clearly better than others.  There is a constant tension between the legal rights of creditors and debtors; and each jurisdiction is to some extent more or less favorable to one or the other.

States like Florida and Texas have virtually unlimited homestead exemptions for principal residences.  Other states have surprisingly low exemptions.

States like Nevada, South Dakota, Delaware and Alaska have had favorable domestic asset protection trust (DAPT) statutes for some time now.  Only about 15 states allow DAPTs.  While these statutes have still not been tested in the courts, they are worth considering as part of an overall asset protection plan.

For non-U.S. jurisdictions, the Cook Islands has been increasingly recognized as a favorable jurisdiction for an offshore trust.  Despite some recent negative publicity, the Swiss banking system provides many advantages for offshore accounts.  Various other foreign jurisdictions have laws that can be utilized for asset protection planning.

You always need to consider your own state’s law no matter what other jurisdictions you utilize for asset protection planning purposes.  But asset protection planning clearly requires a multi-jurisdictional analysis.  There may be significant advantages to setting up a trust, LLC or other entity in a state other than your own.

The key point is that each state and foreign jurisdiction has many laws that affect asset protection planning.  One size does not fit all; and each situation should be looked at individually. 

Financial disaster can stem from personal setbacks like divorce, business disputes, litigation, and numerous other causes.  But the last few months of 2012 remind us that sudden, unexpected financial catastrophes can also come from other sources – – like natural disasters and general economic conditions.

Hurricane Sandy is a grim reminder that certain losses are simply not covered by insurance.  The potential “fiscal cliff” we are currently facing is a grim reminder that political deadlock can trigger severe economic woes.  Our current environment is increasingly one of uncertainty.  It is more prudent than ever to structure assets in a way that they are as protected as applicable law permits. 

Simply re-titling assets between spouses (and possibly other family members); family LLCs; and various trust arrangements are just a few of the possible strategies that could better protect your assets.  There is no “magic bullet.”  Each situation has to be analyzed on its own.  But one thing is clear:  asset protection planning (just like estate planning) is best done before disaster strikes.

As I noted in a post about a month ago we are facing potentially dramatic year-end changes to the federal estate and gift tax.  The “exemption amount” could drop from $5 million to $1 million.  In any event, it seems like the exemption will ultimately be less than it is now.

This means that for many high net worth individuals, 2012 is a good year to make gifts.  It also means that you may have a very valid, independent reason to transfer certain assets (other than for asset protection).  That is, a challenge to any transfer you make could be at least partially defended by the fact that there are very important tax reasons to make the transfer this year.

In any event, 2012 could be a good year for high net worth individuals to consider making gifts.  This would certainly be worth discussing with your estate planning attorney.

Debt collection companies will come under federal supervision beginning in January when the Consumer Financial Protection Bureau begins its oversight of large collection agencies.  The new federal agency will have authority to issue rules that will be binding on the larger debt collection companies throughout the United States.  An October 24, 2012 article in the New York Times by Edward Wyatt contains a good description of the new agency. 

 As I have said before, there is certainly nothing wrong with debt collection – – as long as it is done in a responsible and legal manner.  Due to abuses in this area, we now have new federal regulation.

 Ohio does not currently allow you to set up a Domestic Asset Protection Trust to protect your own assets.  But you can set up a trust that protects assets that you leave to a beneficiary other than yourself.  This kind of trust is commonly referred to as a “spendthrift trust”.  Many trusts that are formed for general estate planning reasons have spendthrift provisions. 

In 1963, the Ohio Supreme Court held that spendthrift provisions in a trust were not effective against the claims of a beneficiary’s creditors.  Twenty-eight years later, in 1991, the Ohio Supreme Court reversed its earlier decision and declared that spendthrift trust provisions were valid under Ohio law. 

One of my partners, Paul Fidler, recently spoke about this topic at the Cleveland Metropolitan Bar Association Estate Planning Institute. The outline of his presentation provides more detailed information about this important kind of trust provision. 

Any trust that you set up for someone else’s benefit should generally include a “spendthrift clause” which will help to protect assets from claims of the beneficiary’s creditors. 

As of January 1, 2013, the federal estate and gift tax “exemption amount” will go from $5 million to $1 million.  The tax rate will increase from 35% to 55% (in some cases higher than 55%).  While Congress may change this before year-end (or make retroactive changes early next year), there is no assurance that it will do so.

 

If your net worth is over $1 million (remember for estate tax purposes you have to add the death benefit of all life insurance) – – you should consult with your estate planning attorney to be sure you are as protected as possible from the federal estate and gift tax.

 

Asset protection planning is not the same as estate planning.  But right now, asset protection planning should include a focus on the dramatic estate and gift tax changes that may become effective at year-end.

An $8.5 million jury verdict seems high, doesn’t it?  But if you consider that the injured party was an infant who suffered brain damage (and will require lifelong care), then the amount of damages could be perfectly reasonable. 

According to a recent article by Tom Feran in the Cleveland Plain Dealer, a Cuyahoga County Common Pleas jury has ordered MetroHealth Medical Center in Cleveland to pay $8.5 million to the mother of a child who suffered permanent brain injury at birth several years ago.  While the hospital contended that a placental infection caused the problem, the jury found the hospital to be negligent.  I have no idea if imposing liability on the hospital in this particular case is justified or not.  But I do know that medical and other expenses for an injured party can cost many millions of dollars.  If you are found to be negligent in providing professional services, or in a business activity, or say in an auto accident, you could become responsible for an enormous amount of damages.

While I firmly believe that all individuals and businesses should carry adequate insurance, it is also reasonable to take advantage of laws that allow you to protect your assets.  It is always possible that you could face a judgment in excess of insurance limits – or for something that is not covered by insurance.

 

In case you needed yet another reason for asset protection planning…

An increasing problem with jurors is the unauthorized use of social media during trial.  A recent front page article in the Cleveland Plain Dealer by Alison Grant on August 29, 2012 has some shocking examples.  One juror tried to “friend” a witness.  Jurors in an embezzlement trial discussed the case on Facebook.  In another trial, nine jurors admitted conducting Google searches and checking Wikipedia.  These kinds of actions by jurors are prompting courts to give jury instructions about the use of social media during trials.

I believe most jurors treat their responsibilities very seriously and do their best to reach a fair verdict.  But it is important to keep in mind that it is often difficult to predict how a judge or jury will rule.  This is one of the big reasons to take advantage of laws that allow you to protect your assets – before you are involved in any litigation.

As I mentioned in a post about a year ago, estate planning and asset protection planning are not the same.  They are related.  It is often advisable to focus on them at the same time.  But they involve different considerations.

Here is one example. A general rule for estate planning is to divide assets equally between spouses. This is usually advisable from a federal estate tax standpoint.  But this may or may not be advisable from an asset protection standpoint.  If one spouse is in a high risk occupation, it may be better to have more assets titled in the name of the other spouse.  A family limited liability company might also be a good option.

Another example is holding assets in joint names.  This is frequently used for convenience and to avoid probate.  It is often not optimal, however, from an asset protection standpoint.

The key point to remember is that each client’s situation must be examined individually.  Simply having a will, trust or other estate planning documents in place does not necessarily mean you are adequately protecting any of your assets.

 Credit card companies certainly have the right to collect legitimate debts.  But a recent New York Times article by Jessica Silver Greenberg reports that many of the recent lawsuits being filed by credit card companies rely on erroneous documents, incomplete records and generic testimony.

I recently represented a third-generation business owner who lost his business in the recent recession.  Several credit card companies sued the owner and his wife for corporate credit card debt – even though they had signed no personal guarantees or any other written agreements.  In each case the credit card company alleged that some fine print buried in generic online documents somehow subjected the owner to personal liability.  My experience was exactly the one reported by the New York Times.  The credit card companies had incomplete records and they were filing lawsuits without doing much investigating prior to filing.

This is another reminder that your personal assets can come under attack in ways that you could have never reasonably anticipated.  Having an asset protection plan in place can be a huge benefit in the event of an unexpected lawsuit.