Asset protection
Encyclopedia
Asset protection is a set of legal techniques and a body of statutory and common law
dealing with protecting asset
s of individuals and business entities from civil money judgments. The goal of all asset protection planning is to insulate assets from claims of creditors without concealment or tax evasion
.
, and the two practice areas go hand-in-hand. When a debtor has none to few assets, the bankruptcy route is preferable. When the debtor has significant assets, asset protection may be the solution.
laws exempt certain assets from creditors, including certain retirement plans. All fifty states also have laws that exempt certain assets from creditors. These vary from state to state, but they often include exemptions for a certain amount of equity
in a personal residence, individual retirement accounts
, clothing, or other personal property.
All fifty U.S. states also have laws that protect the owners of a corporation
, limited partnership
, or limited liability company
from the liabilities of the entity. Many states limit the remedies of a creditor of a limited partner or a member in an LLC, thereby providing some protection for the assets of the entity from the creditors of a member.
All fifty U.S. states provide some protection for the assets of a trust against the creditors of the beneficiaries
. Some states allow asset protection for a self-settled trust (a trust in which the settlor or creator of the trust is included as a potential discretionary beneficiary) and some states do not.
Creditors have several tools to overcome the laws that provide asset protection. First, there are federal and state fraudulent transfer
laws. Today there are two bodies of fraudulent transfer law: the Bankruptcy Code and state fraudulent transfer statutes. Most states have adopted Uniform Fraudulent Transfer Act which defines what constitutes a fraudulent transfer. The UFTA and the Bankruptcy Code both provide that a transfer made by a debtor is fraudulent as to a creditor if the debtor made the transfer with the "actual intention to hinder, delay or defraud" any creditor of the debtor. Regarding the modifier "any" (creditor), Jacob Stein
, author of textbooks on asset protection, divides the creditors into three classes: present, future and future potential creditors. While UFTA applies clearly to present creditors, the distinction between a future creditor and a future potential creditor is not as clear. The UFTA is commonly held to apply only to future creditors and not to future potential creditors (those whose claim arises after the transfer, but there was no foreseeable connection between the creditor and the debtor at the time of the transfer).
There are also laws which allow a creditor to pierce the corporate veil
of an entity and go after the owners for the debts of the entity. It may also be possible for a creditor of a member to reach the assets of an entity through a constructive trust claim, or a claim for a reverse piercing of a corporate veil.
Asset protection planning requires a working knowledge of federal and state exemption laws, federal and state bankruptcy laws, federal and state tax laws, the comparative laws of many jurisdictions (onshore and offshore), choice of law principals, in addition to the laws of trusts, estates, corporations and business entities. The process of asset protection planning involves assessing the facts, circumstances, and objectives of an individual, evaluating the pros and cons of the various options, designing a structure that is most likely to accomplish all the objectives of the individual (including asset protection objectives), preparing legal documents to carry out the plan, and ensuring that the various legal entities are operated properly in accordance with the laws and the objectives of the individual. This process involves providing legal advice and legal work and most states prohibit the practice of law without a license.
Asset protection planning began to develop as a stand-alone area of the law in the late 1970s. It began coming into prominence in the late 1980s, with the advent and the marketing of offshore asset protection trusts. Colorado attorney Barry Engel is credited with the introduction of that concept and the development of asset protection trust law statutes in the Cook Islands. The most distinctive feature of the offshore trust
is the fact that the settlor or creator of the trust may be included among the potential beneficiaries of the trust without causing the assets of the trust to be subject to the creditors of the settlor. This is often referred to as a "self-settled trust."
Over the years, this new field of law enjoyed a marginal reputation, but started going mainstream in the mid-1990s. A 2003 article in the Wall Street Journal claimed that 60% of America's millionaires have considered engaging in asset protection planning.
Choice of law rules in the United States make it possible for a person from any state to create a trust, corporation, limited partnership or limited liability company that is governed by the laws of any other state or jurisdiction. Because of this ability to "forum shop," various states and other jurisdictions have modified their laws to allow greater asset protection in order to make them competitive with other jurisdictions.
In most states, the assets of a self-settled trust are not protected from the creditors of the settlor. In 1997, the State of Alaska passed a statute which provided that the assets of an Alaska self-settled trust are not subject to the creditors of the settlor. Since 1997, the following states have adopted legislation allowing for a self-settled asset protection trust: Nevada
, Delaware
, South Dakota
, Wyoming
, Tennessee
, Utah
, Oklahoma
, Colorado
, Missouri
, Rhode Island
and New Hampshire
. This legislation created a favorable offshore asset protection trust jurisdiction also for non-US settlors.
There is considerable debate about the comparative effectiveness of the asset protection provided by the laws of each jurisdiction, onshore and offshore. Similarly, the asset protection features provided by corporations, limited partnerships and limited liability companies vary from jurisdiction to jurisdiction. Once again, Alaska's limited liability company statute provides innovative advantages over other states. Case law from North Carolina
demonstrates the asset protection advantages of a transfer to a limited liability company (see Herring v. Keasler, 150 NC App 598 (01-1000) 06/04/2002).
Just as the Cook Islands
have developed a reputation for the best offshore jurisdiction for an asset protection trust, Nevis
stands out in the competition for the best jurisdiction to file a limited liability company. The Nevis limited liability company statute is based on the Delaware limited liability statute, but they have a few added advantages. One advantage of a Nevis LLC is that the members and managers are not disclosed to the public.
There is some debate over the ethics of asset protection planning. On one hand, every attorney that creates a trust, corporation, limited partnership, or limited liability company is engaging in some form of asset protection planning. On the other hand, most would agree that it is ethically inappropriate to assist a person to commit fraud or evade income taxes. The timing and the purposes of the plan seem to be the determinative factors as to whether a plan will be considered ethically and legally appropriate. In recent cases, individuals have gone to jail for contempt of court for failing to unwind a plan that a judge felt was repugnant to our principals of law and justice.
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
dealing with protecting asset
Asset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
s of individuals and business entities from civil money judgments. The goal of all asset protection planning is to insulate assets from claims of creditors without concealment or tax evasion
Tax evasion
Tax evasion is the general term for efforts by individuals, corporations, trusts and other entities to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability,...
.
Overview
Asset protection consists of methods available to protect assets from liabilities arising elsewhere. It should not be confused with limiting liability, which concerns the ability to stop or constrain liability to the asset or activity from which it arises. Assets that are shielded from creditors by law are few (common examples include some home equity, certain retirement plans and interests in LLCs and limited partnerships (and even these are not always unreachable)). Assets that are almost always unreachable are those to which one does not hold legal title. In many cases it is possible to vest legal title to personal assets in a trust, an agent or a nominee, while retaining all the control of the assets. The goal of asset protection is similar to bankruptcyBankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
, and the two practice areas go hand-in-hand. When a debtor has none to few assets, the bankruptcy route is preferable. When the debtor has significant assets, asset protection may be the solution.
United States legislation
United States federal bankruptcy laws and ERISAEmployee Retirement Income Security Act
The Employee Retirement Income Security Act of 1974 is an American federal statute that establishes minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans...
laws exempt certain assets from creditors, including certain retirement plans. All fifty states also have laws that exempt certain assets from creditors. These vary from state to state, but they often include exemptions for a certain amount of equity
Home equity
Home equity is the market value of a homeowner's unencumbered interest in their real property—that is, the difference between the home's fair market value and the outstanding balance of all liens on the property. The property's equity increases as the debtor makes payments against the...
in a personal residence, individual retirement accounts
Pension
In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.The terms retirement...
, clothing, or other personal property.
All fifty U.S. states also have laws that protect the owners of a corporation
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
, limited partnership
Limited partnership
A limited partnership is a form of partnership similar to a general partnership, except that in addition to one or more general partners , there are one or more limited partners . It is a partnership in which only one partner is required to be a general partner.The GPs are, in all major respects,...
, or limited liability company
Limited liability company
A limited liability company is a flexible form of enterprise that blends elements of partnership and corporate structures. It is a legal form of company that provides limited liability to its owners in the vast majority of United States jurisdictions...
from the liabilities of the entity. Many states limit the remedies of a creditor of a limited partner or a member in an LLC, thereby providing some protection for the assets of the entity from the creditors of a member.
All fifty U.S. states provide some protection for the assets of a trust against the creditors of the beneficiaries
Beneficiary (trust)
In trust law, a beneficiary or cestui que use, a.k.a. cestui que trust, is the person or persons who are entitled to the benefit of any trust arrangement. A beneficiary will normally be a natural person, but it is perfectly possible to have a company as the beneficiary of a trust, and this often...
. Some states allow asset protection for a self-settled trust (a trust in which the settlor or creator of the trust is included as a potential discretionary beneficiary) and some states do not.
Creditors have several tools to overcome the laws that provide asset protection. First, there are federal and state fraudulent transfer
Fraudulent conveyance
A fraudulent conveyance, or fraudulent transfer, is a civil cause of action. It arises in debtor/creditor relations, particularly with reference to insolvent debtors. The cause of action is typically brought by creditors or by bankruptcy trustees...
laws. Today there are two bodies of fraudulent transfer law: the Bankruptcy Code and state fraudulent transfer statutes. Most states have adopted Uniform Fraudulent Transfer Act which defines what constitutes a fraudulent transfer. The UFTA and the Bankruptcy Code both provide that a transfer made by a debtor is fraudulent as to a creditor if the debtor made the transfer with the "actual intention to hinder, delay or defraud" any creditor of the debtor. Regarding the modifier "any" (creditor), Jacob Stein
Jacob Stein
Jacob Stein is a California attorney and an authority on the subject of asset protection. His textbooks on asset protection are used by Lorman Education Services, National Business Institute, California CPA Society, and the California CPA Education Foundation...
, author of textbooks on asset protection, divides the creditors into three classes: present, future and future potential creditors. While UFTA applies clearly to present creditors, the distinction between a future creditor and a future potential creditor is not as clear. The UFTA is commonly held to apply only to future creditors and not to future potential creditors (those whose claim arises after the transfer, but there was no foreseeable connection between the creditor and the debtor at the time of the transfer).
There are also laws which allow a creditor to pierce the corporate veil
Piercing the corporate veil
Piercing the corporate veil or lifting the corporate veil is a legal decision to treat the rights or duties of a corporation as the rights or liabilities of its shareholders or directors. Usually a corporation is treated as a separate legal person, which is solely responsible for the debts it...
of an entity and go after the owners for the debts of the entity. It may also be possible for a creditor of a member to reach the assets of an entity through a constructive trust claim, or a claim for a reverse piercing of a corporate veil.
Asset protection planning requires a working knowledge of federal and state exemption laws, federal and state bankruptcy laws, federal and state tax laws, the comparative laws of many jurisdictions (onshore and offshore), choice of law principals, in addition to the laws of trusts, estates, corporations and business entities. The process of asset protection planning involves assessing the facts, circumstances, and objectives of an individual, evaluating the pros and cons of the various options, designing a structure that is most likely to accomplish all the objectives of the individual (including asset protection objectives), preparing legal documents to carry out the plan, and ensuring that the various legal entities are operated properly in accordance with the laws and the objectives of the individual. This process involves providing legal advice and legal work and most states prohibit the practice of law without a license.
Asset protection planning began to develop as a stand-alone area of the law in the late 1970s. It began coming into prominence in the late 1980s, with the advent and the marketing of offshore asset protection trusts. Colorado attorney Barry Engel is credited with the introduction of that concept and the development of asset protection trust law statutes in the Cook Islands. The most distinctive feature of the offshore trust
Offshore trust
An offshore trust is simply a conventional trust that is formed under the laws of an offshore jurisdiction.Generally offshore trusts are similar in nature and effect to their onshore counterparts; they involve a settlor transferring assets on the trustees to manage for the benefit of a person or...
is the fact that the settlor or creator of the trust may be included among the potential beneficiaries of the trust without causing the assets of the trust to be subject to the creditors of the settlor. This is often referred to as a "self-settled trust."
Over the years, this new field of law enjoyed a marginal reputation, but started going mainstream in the mid-1990s. A 2003 article in the Wall Street Journal claimed that 60% of America's millionaires have considered engaging in asset protection planning.
Choice of law rules in the United States make it possible for a person from any state to create a trust, corporation, limited partnership or limited liability company that is governed by the laws of any other state or jurisdiction. Because of this ability to "forum shop," various states and other jurisdictions have modified their laws to allow greater asset protection in order to make them competitive with other jurisdictions.
In most states, the assets of a self-settled trust are not protected from the creditors of the settlor. In 1997, the State of Alaska passed a statute which provided that the assets of an Alaska self-settled trust are not subject to the creditors of the settlor. Since 1997, the following states have adopted legislation allowing for a self-settled asset protection trust: Nevada
Nevada
Nevada is a state in the western, mountain west, and southwestern regions of the United States. With an area of and a population of about 2.7 million, it is the 7th-largest and 35th-most populous state. Over two-thirds of Nevada's people live in the Las Vegas metropolitan area, which contains its...
, Delaware
Delaware
Delaware is a U.S. state located on the Atlantic Coast in the Mid-Atlantic region of the United States. It is bordered to the south and west by Maryland, and to the north by Pennsylvania...
, South Dakota
South Dakota
South Dakota is a state located in the Midwestern region of the United States. It is named after the Lakota and Dakota Sioux American Indian tribes. Once a part of Dakota Territory, South Dakota became a state on November 2, 1889. The state has an area of and an estimated population of just over...
, Wyoming
Wyoming
Wyoming is a state in the mountain region of the Western United States. The western two thirds of the state is covered mostly with the mountain ranges and rangelands in the foothills of the Eastern Rocky Mountains, while the eastern third of the state is high elevation prairie known as the High...
, Tennessee
Tennessee
Tennessee is a U.S. state located in the Southeastern United States. It has a population of 6,346,105, making it the nation's 17th-largest state by population, and covers , making it the 36th-largest by total land area...
, Utah
Utah
Utah is a state in the Western United States. It was the 45th state to join the Union, on January 4, 1896. Approximately 80% of Utah's 2,763,885 people live along the Wasatch Front, centering on Salt Lake City. This leaves vast expanses of the state nearly uninhabited, making the population the...
, Oklahoma
Oklahoma
Oklahoma is a state located in the South Central region of the United States of America. With an estimated 3,751,351 residents as of the 2010 census and a land area of 68,667 square miles , Oklahoma is the 28th most populous and 20th-largest state...
, Colorado
Colorado
Colorado is a U.S. state that encompasses much of the Rocky Mountains as well as the northeastern portion of the Colorado Plateau and the western edge of the Great Plains...
, Missouri
Missouri
Missouri is a US state located in the Midwestern United States, bordered by Iowa, Illinois, Kentucky, Tennessee, Arkansas, Oklahoma, Kansas and Nebraska. With a 2010 population of 5,988,927, Missouri is the 18th most populous state in the nation and the fifth most populous in the Midwest. It...
, Rhode Island
Rhode Island
The state of Rhode Island and Providence Plantations, more commonly referred to as Rhode Island , is a state in the New England region of the United States. It is the smallest U.S. state by area...
and New Hampshire
New Hampshire
New Hampshire is a state in the New England region of the northeastern United States of America. The state was named after the southern English county of Hampshire. It is bordered by Massachusetts to the south, Vermont to the west, Maine and the Atlantic Ocean to the east, and the Canadian...
. This legislation created a favorable offshore asset protection trust jurisdiction also for non-US settlors.
There is considerable debate about the comparative effectiveness of the asset protection provided by the laws of each jurisdiction, onshore and offshore. Similarly, the asset protection features provided by corporations, limited partnerships and limited liability companies vary from jurisdiction to jurisdiction. Once again, Alaska's limited liability company statute provides innovative advantages over other states. Case law from North Carolina
North Carolina
North Carolina is a state located in the southeastern United States. The state borders South Carolina and Georgia to the south, Tennessee to the west and Virginia to the north. North Carolina contains 100 counties. Its capital is Raleigh, and its largest city is Charlotte...
demonstrates the asset protection advantages of a transfer to a limited liability company (see Herring v. Keasler, 150 NC App 598 (01-1000) 06/04/2002).
Just as the Cook Islands
Cook Islands
The Cook Islands is a self-governing parliamentary democracy in the South Pacific Ocean in free association with New Zealand...
have developed a reputation for the best offshore jurisdiction for an asset protection trust, Nevis
Nevis
Nevis is an island in the Caribbean Sea, located near the northern end of the Lesser Antilles archipelago, about 350 km east-southeast of Puerto Rico and 80 km west of Antigua. The 93 km² island is part of the inner arc of the Leeward Islands chain of the West Indies...
stands out in the competition for the best jurisdiction to file a limited liability company. The Nevis limited liability company statute is based on the Delaware limited liability statute, but they have a few added advantages. One advantage of a Nevis LLC is that the members and managers are not disclosed to the public.
There is some debate over the ethics of asset protection planning. On one hand, every attorney that creates a trust, corporation, limited partnership, or limited liability company is engaging in some form of asset protection planning. On the other hand, most would agree that it is ethically inappropriate to assist a person to commit fraud or evade income taxes. The timing and the purposes of the plan seem to be the determinative factors as to whether a plan will be considered ethically and legally appropriate. In recent cases, individuals have gone to jail for contempt of court for failing to unwind a plan that a judge felt was repugnant to our principals of law and justice.