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 to a lawsuit for personal injury in a car accident; even if the litigant caused the collision. Additionally, frivolous lawsuits are often brought for discrimination, defamation, emotional abuse, mental anguish, workplace stress, etc.
When Is the Best Time to Begin an Asset Protection Plan?
It is never too early to begin asset protection planning, but there is a time when it is too late. Once a lawsuit or claim against your assets has been made, it becomes difficult and sometimes impossible to protect those assets without committing fraud. The reason is simple. The law protects potential recipients of favorable legal judgments. Anyone who transfers assets with the intent to delay, hinder, or defraud a creditor or plaintiff is in danger of violating that law. If a court deems an asset transfer to have been “fraudulent”, it may order a reversal of that transfer(s), putting those assets directly into the hands of the plaintiff or judgment creditor.
Asset Protection Terms
Asset protection uses several terms, not in general usage. Click to view our glossary of terms here.
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, you were concerned about a judgment creditor placing a lien against your personal residence. To avoid the lien, you decide to “sell” your house to your brother for $10 with the intention of “buying” it back when the threat has passed. A court could understandably consider the sale to be fraudulent, unwind the transfer and seize the property to satisfy the debt.
Charging Order Protection
Charging Order protection shields personal and business assets from judgments and claims made against an individual. Limited Partnerships and Multi-member LLCs are considered to have good charging order protection in most states. Therefore, assets held in well-drafted LLCs and Limited Partnerships can be protected from the claims and judgments of the owners.
For example, if a personal lawsuit is successful against a man who holds the majority of his assets in well-structured LLCs, the plaintiff may very well win the lawsuit, but would generally be unable to attach any of the assets or seize his interest in the LLC to satisfy the judgment. Placing a charging order (similar to a lien) against the man’s interest in the LLC may very well be the plaintiff’s only legal remedy.
A charging order does not give the plaintiff any rights or management role in the business entity. Depending on the LLC Operating Agreement, the creditor cannot force a liquidation of assets, call for an election of officers, demand a distribution, or even petition for an accounting of LLC activities. Even though he won the lawsuit, the plaintiff may never receive money.
A Corporate Veil can protect a business owner’s personal assets from the judgments and claims against the business. The goal in establishing strong Corporate Veil protection is to attract and absorb all risk within the business, leaving the shareholders, officers, directors, and managers of the business protected. Traditional corporations and LLCs are considered to have good corporate veil protection in most states.
For example, a woman who owns a small pizza restaurant was issued after a food poisoning incident. No deaths occurred, but several customers were hospitalized as a result of improper food handling. The business was structured as an LLC, kept good accounting records, had a separate bank account for business transactions, filed its taxes on time, and upheld the annual meetings required by the state. Unless there was fraud or personal negligence on the part of the owner, the lawsuit should be limited to the assets owned by the LLC.
Note that charging order protection protects assets from claims against the individual. Corporate veil protection protects assets from claims against the business. A good asset protection plan provides both charging order and corporate veil protection!
In today’s world, proper asset protection planning is a must. Our webinars, videos, and
educational events provide methods to learn more about your options and methods to create an optimal plan. Enroll today for a Free Membership in our online archive of valuable information that can save your personal assets in today’s litigious environment.
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.