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Asset Protection PlanningIs It An Area For You?

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It should be considered as a component of comprehensive financial planning

Asset protection is a method of managing legal risks and protecting assets from attachment due to a lawsuit. Because lawsuits have gotten out of control in some states, asset protection planning has become even more critical for those individuals concerned about potential lawsuits.

Although professionals and business owners in certain fields, like medicine and rental real estate, have special concerns about asset protection planning, the topic is important to all individuals today in our litigious society. The goals of asset protection planning generally are to: promote settlement of creditor suits; protect assets from seizure; and protect the credit and reputation of clients.

As a sub-set of risk management, asset protection planning should be considered whenever a financial advisor does comprehensive financial planning.

Moral and Ethical Issues

Before getting involved in asset protection planning, a financial advisor should ask certain questions. Is it something that I should be involved with? Does this planning harm someone else? What is and is not appropriate?

These questions should be considered and, when dealing with clients, discussed with the client’s attorney before getting involved in asset protection planning.

Who’s involved in asset protection planning?

Anyone who is interested in protecting assets should seek the advice of a local state law attorney with expertise in the following areas:

o Debtor/creditor,

o Bankruptcy,

o Conflict of laws,

o Estate planning.

The financial advisor also should be involved since risk management is part of comprehensive financial planning. Asset protection is just one aspect of financial, estate and business planning.

Many techniques and strategies involved in comprehensive financial planning will have an asset protection component. Examples include family limited partnerships, certain trusts and limited liability corporations.

Fraudulent Transfers

All states have laws that provide remedies to creditors when the debtor no longer owns the asset. These laws are aimed at gifts or transfers by a debtor for less than fair market value and with an intent to “hinder, delay or defraud” the creditor.

These laws can result in the creditor obtaining the assets that were transferred if action is pursued within a certain time frame, such as four years. Because of these fraudulent transfer laws, it is difficult for individuals to plan if claims against him/her already exist.

Such transfers in defraud of creditors in some states can subject the individual to criminal penalties. A local attorney can provide advice on when gifting or transfers are appropriate.

Common Sense Planning

In many ways, good asset protection planning is just plain common sense. To avoid problems, one should avoid risks, have liability coverage and plan early. Liability coverages include:

o Professional/errors and omissions,

o Umbrella,

o Medical/LTC,

o Business,

o Officers/directors,

o Personal property,

o Homeowners/auto.

Potentially Safe Assets

Some assets already are protected from creditors because of state laws. Examples of assets that are exempt in some states include:

o Homestead;

o Property owned as tenancy by the entireties;

o Life insurance, cash values/death benefits are subject to state law limits;

o Nonqualified annuities, deferred and immediate annuities are also subject to state law limits.

A financial advisor should be familiar with the rules on life insurance and annuities in his/her state. An advisor can check with a local attorney–someone who might be a center of influence for the advisor–to find out what these rules are in a particular state.

Qualified Plans and IRAs

Qualified retirement plans such as defined benefit plans (both traditional and 412(i) plans) and defined contribution plans, including 401(k) and profit-sharing plans, are exempt from creditors. These include plans for employees and not owner-only plans and not owner-only and spouse plans.

A qualified plan can, however, be attached by the IRS for prior tax liabilities and by former spouses due to a divorce proceeding. A recent U.S. Supreme Court case announced good news for rollover IRAs: They’re now exempt from creditors to the extent reasonably necessary for the support of the debtor and any dependent.

A new bankruptcy law effective Oct. 17, 2005, exempts entirely rollover IRAs in bankruptcy proceedings in all states. Non-rollover IRAs, including Roth IRAs, are protected but only up to a $1 million cap.

Certain Business Entities

Some business entities provide more asset protection than others. When considering a business entity, both the inside liability for debts of the business and the outside liability or liability for personal debts of the owners should be considered. Business entities that may provide better asset protection include family limited partnerships and limited liability corporations.

Both of those entities provide protection to the owners for their outside liabilities or personal debts, since personal creditors cannot technically attach the ownership units and only have a charging order against them.

Certain Trusts

Some trusts that may provide asset protection include:

o Spendthrift trusts–Protect trust assets from creditors of beneficiaries. Spendthrift provisions are easy to include, but the trust requires an independent trustee.

o Irrevocable trusts–Assets are gifted to this trust for the benefit of others. Trust assets are protected from creditors of grantor, assuming no fraudulent transfer.

o Domestic asset protection trusts–An irrevocable spendthrift trust that an individual forms for his/her benefit. Settlor names self as discretionary beneficiary and the trust is administered by an independent trustee. Most states–excepting Alaska, Delaware, Oklahoma, Nevada, Rhode Island and Utah–don’t recognize this trust.

Buyer Beware!

Some trusts, among them constitutional trusts, business trusts, “pure trusts” and freedom trusts, purport to avoid income taxes, provide asset protection and allow you to maintain control. As you might guess, if it is too good to be true, it probably is!

The IRS has warned taxpayers on numerous occasions that these trusts won’t work, and no U.S. court will recognize them. Stay away from these aggressive strategies.

Working with an Attorney and Financial Advisor

The subject of asset protection planning is not an easy one. It is fraught with ethical and moral issues, and with many technicalities. However, if a client plans ahead, works with a competent attorney knowledgeable in these areas and consults with a financial advisor about the impact on the financial plan, it is possible to provide protection legitimately to estate assets and leave the legacy created for the family.

Debra S. Repya, J.D., CLU, ChFC, is director, advanced marketing, at Securian Financial Network, St. Paul, Minn. You can e-mail her at [email protected].

Before getting involved in asset protection planning, a financial advisor should ask certain questions


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