Asset Protection

Quick Guide to Asset Protection

Quick Guide to Asset Protection

If you’re interested in protecting your assets, you’ve come to the right place. The number of reasons to protect your assets is higher now than at any time in history.

If you have done well, worked hard, have significant assets, and perhaps own your own business, you may be at serious risk of a lawsuit knocking at your door.

Through no fault of your own, you could have a lawsuit filed against you. Perhaps your son’s best friend borrowed your car without you knowing it. If he crashes into a car or pedestrian, you may well be liable for any resulting injuries or death.

Perhaps wet umbrellas after a rainstorm caused someone to slip and fall in a building you own before there was time to dry the floor. Yes, the law says that you are only liable if you could have reasonably known a dangerous situation existed and didn’t do anything. Yet if it was a sudden summer thundershower, someone could have broken an arm before your employees could even get mops to the area. You had no time to reasonably know and react that the floor was wet.

In a situation like this, whether you are liable to damages totaling thousands or even millions of dollars depends on the interpretation of a judge and jury.

Don’t be unprotected before potential damaging events.

The average well-off person may have 5 to 7 lawsuits filed against him/her in a lifetime. Five to seven. If you calculate your working life from 25 to 65 years of age, that’s an average of 40 years in a working life. In other words, you may be on the receiving end of a lawsuit an average of every 6 to 8 years.

We live in a highly litigious society. People feel that filing a lawsuit is a normal and natural reaction to the vagaries of life. People in the United States file 94% of all the lawsuits filed in the world.

In times like these, it makes sense to protect your assets. This Quick Guide to Asset Protection is designed to give you a brief overview of the forms of asset protection available and common terms used in discussing assets.

What Is Asset Protection?

The term “asset protection” sounds quite simple, doesn’t it? It is. It refers specifically to a plan developed and enacted to keep your assets (real estate, stocks, bonds, and cash, personal property, and any other assets) safe against potential litigants or creditors.

These potential litigants or creditors could attempt to lay claim to your assets or bring a lawsuit against you for anything from a defaulted mortgage on a commercial property you owned with other people to a lawsuit for personal injury in a car accident, even if the litigant caused the collision.

There are two types of claims that can be brought against a well-off person. Knowing them is part of understanding asset protection.

The first is internal claims. Internal claims are from plaintiffs or creditors who are limited to the assets owned by a particular entity, not a specific person. For example, if someone slips on the stairs of an office building owned by a corporation of which you are part owner, the injured party can only bring damages against the corporation.

The second is external claims. These may include an entity’s assets, but are not limited to them and can include personal assets. If, for example, you were driving a company car owned by a corporation, any plaintiff could sue the company for an accident they claimed involved negligence, but they could attempt to bring suit against you as well. A judgment in their favor could involve both company and personal assets.

What Is the Best Time to Begin an Asset Protection Plan?

It is never too early to begin asset protection planning.

There is a time when it is too late to begin one, however. You cannot begin asset protection moves of any kind once a lawsuit or claim against your assets has been brought against you.

The reason is simple. The law protects potential recipients of favorable legal judgments. Anyone who transfers assets with any intent to delay, hinder, or defraud a creditor or plaintiff is in danger of violating that law.

A court might deem any such transfer of assets “fraudulent.” The court will order a reversal of any asset transfers. The assets will be turned over to a successful plaintiff to pay the judgment.

It is important to note that any total asset protection plan needs to integrate your goals for investment and tax planning as well.

Asset Protection Terms

Asset protection uses several terms, not in general usage. The following defines and gives examples of common terms.

Fraudulent Conveyance

Fraudulent conveyance refers to any attempt to transfer assets (stocks, bonds, real estate, or other property) to someone else in order to defer, hinder, or defraud creditors. As mentioned in the “What Is the Best Time to Begin an Asset Protection Plan?” section above, it may be deemed as fraudulent by the court and the assets recovered and given to the plaintiff.

A court may order the reversal of the transfer (or conveyance). In such cases, the recipient may be ordered to give any assets received to a successful plaintiff.

Suppose, for example, that a court might seize your house for payment of a judgment. If you sold your house at a fraction of market value to a family member, friend, or business associate, the courts might see it as fraudulent conveyance: the sale was undertaken only to remove the house as an asset from the plaintiff.

Charging Order Protection

A charging order may be granted to a successful plaintiff so that he or she can attach any monies from a business entity, such as an LP, to a partner of the entity who is the defendant. In effect, it is analogous to garnishing wages or income. The court affects a charging order. It is usually the same as the amount of any judgment for damages.

A charging order does not give the plaintiff any rights or management role in the business entity.

Protection against charging orders is a key part of asset protection.

Corporate Veil

The corporate veil refers to the separation between business assets liabilities and personal assets and liabilities.

Many corporate entities, including LPs, separate business and personal liabilities. A suit or judgment against a business will not affect the personal assets of limited partners.

However, in some circumstances, the court can allow owners, shareholders, or members of a business entity to be held personally liable for judgments against the entity. That is referred to as “piercing the corporate veil.”

If piercing the corporate veil occurs, a judgment may involve seizing personal real estate, bank and other accounts, investments, and other assets.

In general, piercing the veil occurs when there is perceived wrong-doing by the entity, the persons in it, or both. The action generally occurs for three reasons. The first is if there is no formal legal separation between the entity and the owners. This could occur if personal bills are being paid from the entity’s accounts, for example, or legal incorporation never occurred.

The second is in the case of wrongful or fraudulent actions by the company. If, for example, goods and services were engaged when the partners knew they could not pay for them, or partners acted recklessly or dishonestly, a court might find a cause that LP protection shouldn’t apply.

The third is if the plaintiffs are judged to have been left with an unjust cost. If the two elements above exist, and the plaintiff cannot satisfy the judgment without business assets, the court may perceive an unfairness and pierce the veil as a result.

For that reason, parties not involved in any wrongful actions are not held personally liable.

In today’s world, an asset protection plan is a must. Our webinars, videos, and educational events provide methods to learn more about your options and methods to create an optimal plan.

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