Orange County Blog

Wednesday, August 7, 2019

Asset Protection Manifesto

Almost everyone is aware that an auto insurance policy must be purchased before you are involved in an accident – you cannot buy a policy after you cause an accident.  Nevertheless, people seldom engage in serious Asset Protection Planning before becoming involved in a lawsuit or other potential liability.  That is just a fact.

To be truly effective, an Asset Protection Plan must be implemented years before the incident that gives rise to liability occurs.  However, given the unfortunate fact above, one should not just “throw in the towel” and accept (many times wrongly) that there is no way to protect one’s assets after the occurrence of such an incident. 

There is one hard and fast rule in asset protection – if you do nothing, there is a 100% chance that you will lose your assets

Asset Protection Planning is most important for business owners and professionals.  Here are a few issues that you must be aware of before implementing any Asset Protection Plan:

  1. Accept that implementing your Asset Protection Plan will be expensive, stressful, and painful.It is not fun, although if you undertake the task before becoming involved in a lawsuit, it will be much less stressful and the plan will work better.


  2. You cannot possibly protect everything and the definition of “a successful Asset Protection Plan” may leave you somewhat disappointed.For example, if you settle the $10 million lawsuit against you for $2 million because you have an Asset Protection Plan, is that a success?Some would say yes, some would say no.


  3. Secrecy is not an Asset Protection Plan.You must undertake planning that is open and transparent – relying on pseudonyms does not work.


  4. In Asset Protection Planning, there are always tradeoffs.Certain asset protection techniques will require you to relinquish control of your assets; others may cause you to pay more taxes.For example, if you are married a Transmutation Agreement is very effective to shelter a business owner’s home and other personal assets from business liability but may expose that person to potential losses in a subsequent divorce.


  5. You can’t just give assets away.There are laws in every state that are called “fraudulent conveyance” statutes.These laws make transfers of assets “voidable” by a court so that a defendant cannot simply give his/her assets away to friends or children and then claim that they are “judgement proof”.Understanding fraudulent conveyance laws is critical to proper Asset Protection Planning.


  6. Most of the information regarding Asset Protection on the internet is wrong or misleading, like just about everything else on the internet.And, different competent lawyers may suggest different strategies for your specific situation.There is seldom any clear-cut strategy that is guaranteed to work and that everyone agrees on.


  7. Here are some strategies that have worked for my clients:


    1. Transmutation Agreement.Very popular among professionals, this is an agreement between spouses that changes their community property to separate property, or vise versa.An equal division for fair market value must be made to avoid a fraudulent conveyance challenge; thereafter the family home and other non-business assets will be owned by the non-business owner spouse.If the professional is sued only his/her “dangerous” separate property assets (usually a professional practice or business) will be subject to claims.


    2. QPRT. “Qualified Personal Residence Trust”.A split-interest gift that transfers your personal residence into an irrevocable trust for the benefit of your children.


    3. Third-Party Irrevocable Trust.An irrevocable trust funded with your assets but for the benefit of your children or heirs.You can control the assets but not use them for yourself.


    4. NAPT. “Nevada Asset Protection Trust”.An irrevocable trust that is funded with your assets and that you can use during your lifetime, under certain circumstances.You must hire a Nevada-based Trustee or Trust Company, or have a friend or relative in Nevada that is willing to act as Trustee.


    5. ERISA Retirement Plans.Under Federal law assets contributed into a retirement plan that complies with the Employee Retirement Income Securities Act are safe from judgements and creditors.Common plans of this type are 401k plans and Defined Benefit Plans.Individual Retirement Accounts (IRAs) are not covered under ERISA.


    6. Private Retirement Plans.Under California law (CCP section 704.115) if a California resident participates in a Company-sponsored retirement plan, assets contributed to that plan by the company and by the employee are safe from judgments and creditors.This type of plan does not provide any tax benefit but also does not have to comply with ERISA rules.


    7. Incorporation/LLCs.If you are operating a business, you must conduct business in a manner that limits the owner’s liability so that his/her personal assets are not at risk from business problems.Likewise, your business should adhere to proper Human Resource Practices and have a Procedure Manual.


    8. Umbrella Insurance.Very basic, very important, very inexpensive.This is liability coverage for all of your automobiles and real estate assets.


  8. Additional insights regarding Fraudulent Conveyances.First, of course, the plaintiff must be victorious in his/her lawsuit against you.During the collection process on the judgement, if there is: 1) a transfer of assets for less than fair market value; and 2) if the plaintiff brings a suit to have that transfer held to be a “fraudulent conveyance” within the statute of limitations for such transfer; and 3) if the court holds that that transfer was indeed a fraudulent conveyance; then 4) the transfer can be voided by the court and the assets will be ordered to be transferred back to the plaintiff.Therefore the plaintiff, if awarded a judgement, must then undertake another lawsuit to determine if the defendant had made any fraudulent conveyances.The additional legal expense and time is sometimes enough to put the defendant in a more favorable settlement position.And, there are statutes of limitation on transfers, which vary by jurisdiction.For example, in California the basic statute of limitation for a fraudulent conveyance lawsuit is 4 years, but in Nevada it is only 2 years.Bottom line – even though an incident has occurred or a lawsuit has been filed, a transfer that would possibly be held to be a “fraudulent conveyance” might still be worthwhile and should not be dismissed without thorough legal analysis.


  9. Bankruptcy is not Asset Protection; it is the result of failing to have an effective Asset Protection plan!


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