A few weeks ago I wrote about 5 Asset Protection Mistakes You Should Avoid. Here are 5 more asset protection mistakes you should avoid.
1. Owning Assets in Your Own Name
One of the key ways to protect assets is to transfer them out of your ownership. If you don’t own it, it can’t be taken from you. That is if it’s done properly. But if you own assets in your name, they’re potentially at risk of your personal liabilities. Common ways to transfer property out of your name include transfers into a spouse’s separate revocable trust, into an irrevocable asset protection trust, or into an LLC with other members. Always get advice from an attorney who understands the implications. But remember not to go too far. There is a balance. Mistake #2 below addresses why you should be careful not to go too far.
2. Transferring Too Many Assets out of Your Name
It is appropriate to transfer assets out of your name, such as transferring your brokerage account or residence into an asset protection trust. But you need to carefully choose which “chips” to take off the table. Here are two reasons why you shouldn’t transfer ALL of your assets (or most) out of your name:
- Fraudulent Transfer by Insolvency: If you transfer so many assets out of your name that you’re “insolvent” afterwards, it is considered a “fraudulent (or voidable) transfer.” Pigs get fat and hogs get slaughtered right? In that case, the whole thing can fall apart and none are protected.
- Assets on Balance Sheet: It’s still a good idea to keep some assets on your balance sheet for other reasons. You may need a certain amount of assets to be considered an accredited investor or you need assets to justify financing for loans. For example, I have clients who buy, sell, and rent real estate. To do so, they continually finance projects and need sufficient assets to qualify for such arrangements. They transferred other assets (e.g. brokerage accounts and vacation properties) into their asset protection trust.
3. Not Using an Attorney
This is not just a shameless plug to get you to hire me. There are important reasons for this. You need an expert who can help navigate the sophisticated world of asset protection. The tools available and the nuances and consequences are something that an experienced asset protection attorney can address. And when you work with an attorney, you have the benefit of attorney client privilege. I can’t overstate the importance of privileged communications. Communications between you and your attorney are confidential. This is not the case when you go it alone or use a service or an advisor who is not an attorney. When you hire an attorney make sure to consider their background and experience in the area. Do your homework too. Second opinions can give you peace of mind.
4. Not Respecting the Asset Protection Structure
No matter how great your asset protection structure is, if you don’t operate it properly it could all fall apart. Some strategies are more involved than others. My philosophy is to keep it as simple as possible while achieving the desired goal. However, even simple structures need to be operated properly. For example, if you transfer assets into an asset protection trust you technically no longer own those assets. But if you act in a way that contradicts the terms of the trust a savvy creditor can pierce the trust under alter ego theory (aka reverse veil piercing). This means that if you don’t respect the trust terms and follow them, the creditor doesn’t have to either. Your should understand the structure and how to operate it to keep things running properly. This can be simple, but remember to follow the rules.
5. Thinking that Asset Protection is Tax Planning
Okay, both asset protection planning and tax planning are completely appropriate. But that does not necessarily mean that they are one and the same. The most popular asset protection trusts are completely tax neutral. What I mean by tax neutral is that the tax treatment is the same before and after you implement the structure. That said, there are some types of structures that specifically address tax consequences which may also provide asset protection. Different types of irrevocable trusts can provide a variety of different tax treatments while at the same time protecting assets. And please remember that protecting assets from potential future creditors does not mean that you don’t have to pay appropriate taxes.
Asset protection is something most people need in some form or another. I hope this helps you avoid some common asset protection mistakes.