What Are the Top Misconceptions People Have About Asset Protection?

The biggest misconception is that if you put your assets into a trust, you will be protected. This is completely false.  There are many kinds of trusts, and 99 percent of the time, the kind of trust being referred to is a revocable trust, which is commonly used to avoid probate, to avoid a conservatorship, and to minimize estate taxes.  However, revocable trusts don’t protect your assets!

The other big misconception or big strategy that doesn’t work for asset protection is that you can do this at the very last minute, after you have already been served with a lawsuit. I get many calls from people who explain, “Mr. Mandel, I understand that you’re an asset protection specialist, and I’d like to consult with you. I just got served with a lawsuit.” At this point, it’s too late.

Asset protection must be done well in advance, because there are fraudulent conveyance rules that essentially prevent people from transferring assets while they’re in the middle of a lawsuit.

Compared to Asset Protection, What Does a Trust Do?

Trusts that you set up yourself don’t really protect you, with some very specific exceptions. There are “Asset Protection Trusts”, but as a general rule, they’re not very useful for most situations.  The reason I say that is that in order to be effective as an asset protection strategy, an irrevocable trust must be set up years in advance, and the person creating that kind of trust must give up control of the assets –most people don’t want to relinquish control, therefore it is unusual to create this kind of trust.

The general idea behind asset protection is that the earlier you do it, the better.

Your asset protection plan cannot rely on secrecy, which is another misconception. People try to hide their assets, title them in different names, and come up with creative ways to identify these various trusts or businesses. However, secrecy is not an asset protection strategy. There are no secrets anymore. For $300, I can find out what your social security number is, what your bank account numbers are, and what your balances are. It’s very easy, especially in today’s age when there are computer hackers.

The best asset protection plan involves transparency. Everybody can see what it is and understand how you’ve set up your affairs. It takes advantage of legitimate legal statutes, laws, and structures that will protect your assets. Effective asset protection must have a legitimate business, estate planning, or tax reason.

If you start doing asset protection for the sake of asset protection only, it’s not going to work. It’s a paradox. The overriding public policy in the United States, however, is not to favor asset protection. Our entire civil court system is designed to make the plaintiff “whole” again.

Judges who rule on cases and issue judgments want to see those judgments enforced. These judges don’t want people to avoid liability.  However, the idea is that if you structure your affairs the right way, in a legal way, and in an ethical way, collecting judgments can be very difficult for the plaintiff. It must be done for a legitimate business, estate planning, or tax planning reason.

If you are in court and the lawyer asks you, “Why did you create this limited partnership?” and you say, “I did it because I saw an ad in a magazine that said that if I put my assets into this limited partnership, I would be protected from any lawsuit,” well, you’ve just shot yourself in the foot. The judge is not going to respect that. The court will rule “That is not a legitimate reason, and we’re not going to shield those assets.”

This is the general theory. The bottom line is that if you do some asset protection appropriately and ahead of time, the most frivolous creditors will go away. Most of them are lawyers who don’t really have a good case but think that perhaps they can get a quick settlement because of the cost of litigation and the risk of litigation. If they won’t go away, perhaps you’ll get a better settlement because they understand that actually collecting will be a long, hard, and expensive proposition.

For more information on Misconceptions About Asset Protection, a free initial consultation is your next best step. Get the information and legal answers you’re seeking by calling (949) 660-0007 today.

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