What is Asset Protection?
Asset protection (also called “debtor-creditor law”) can be defined as a concept of preserving and protecting an individual’s assets from illogical or frivolous, often very harmful claims against an individual or a business entity.
What Is the Purpose of Asset Protection?
The purpose of asset protection is to prevent the enforcement of judgments against an individual’s assets. The goal is to protect assets from claims of a creditor without tax evasion or concealment.
The asset protection concept consists of techniques used to insulate assets from any liabilities that may arise elsewhere. (Limiting liability and asset protection are different from each other. Limiting liability is actually the ability to constrain or stop the liability or any other action that can lead to it.)
There are very few assets that are actually shielded from creditors (these include retirement plans, home equity, interests in limited partnerships), but these can be reachable in some cases. Certain assets are always unreachable, and these include all those assets to which you don’t hold legal title. Other people (agents) can hold legal title, but you are the one to retain the control of your assets.
Asset protection and bankruptcy practices are closely related to each other. If a debtor has no assets, the preferable route will be bankruptcy. If a debtor has assets, the solution can be found in asset protection.
In the United States, some retirement plans are exempt from creditors. The laws vary, depending on the state, but nearly all of them include exemptions for personal residence equity, retirement accounts, personal property, etc.
In all states, the owners of corporations, limited liability companies or limited partnerships are protected from the entity’s liability. When it comes to trust assets, there is certain protection against the beneficiaries’ creditors. In some states, asset protection can be used for self-settled trusts. However, this is not possible in all states.
There are several ways to overcome the asset protection laws. State fraudulent transfer laws can be used for such purposes. Uniform Fraudulent Transfer Act (UFTA) has been adopted by most states, so all these states define fraudulent transfer in the same way.
Certain laws can be used by a creditor for piercing the corporate veil of a business entity and then go after the entity owners.
Asset protection plans always require extensive knowledge of state (and federal) laws, bankruptcy laws, tax laws, trust laws, corporation laws, etc. Legal work and legal advice are always involved in the entire asset protection process.