What Is Asset Protection?
Let me explain asset protection to you directly: it's about adopting strategies to guard your wealth. As part of your financial planning, asset protection aims to shield your assets from creditor claims. You and your business can use these techniques to limit creditors' access to valuable assets, all while staying within the rules of debtor-creditor law.
Key Takeaways
- Asset protection refers to strategies used to guard your wealth from taxation, seizure, or other losses.
- It helps insulate assets legally without engaging in illegal practices like concealment, contempt, fraudulent transfer under the 1984 Uniform Fraudulent Transfer Act, tax evasion, or bankruptcy fraud.
- Jointly-held property under tenants by entirety can serve as a form of asset protection.
Understanding Asset Protection
You need to understand that asset protection insulates your assets legally, steering clear of illegal actions such as hiding assets, contempt, fraudulent transfers as defined in the 1984 Uniform Fraudulent Transfer Act, tax evasion, or bankruptcy fraud. Experts like me advise starting effective asset protection before any claim or liability hits, because it's often too late afterward. Common methods include asset protection trusts, accounts-receivable financing, and family limited partnerships (FLP).
If you have few assets, bankruptcy might be a better path than setting up asset protection. But if you have significant assets, I recommend proactive protection. Remember, certain assets like retirement plans are exempt from creditors under U.S. federal bankruptcy and ERISA laws from 1974. Many states also allow exemptions for a specified amount of home equity in your primary residence and other personal items like clothing.
Important Considerations
Here's something crucial: each U.S. state has laws protecting owners of corporations, limited partnerships (LPs), and limited liability corporations (LLCs) from the entity's liabilities. Keep this in mind as you plan.
Asset Protection and Real Estate
When it comes to real estate, jointly-held property under tenants by entirety can act as asset protection for married couples. You and your spouse share a claim to the whole property, not just parts of it. This means creditors with claims against one spouse can't attach the property for debt recovery. However, if a creditor has claims against both of you, this protection doesn't apply.
Some people try putting property or financial resources in a family member's or trusted associate's name—for instance, gifting ownership of real estate to an heir while you continue using it. This can complicate seizure efforts since actual ownership must be proven. You might also domicile financial accounts in offshore banks to legally avoid taxes on those funds.
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