Asset Protection Plan

What is an Asset Protection Plan?

An asset protection plan aims to keep your property safe from judgment in the event of a lawsuit. Such a lawsuit could relate to a negligent act you performed (like being responsible for an accident) to a lawsuit related to the foreclosure of a property you own. Perhaps the most important aspect of asset protection is engaging in such protections as part of your estate planning process early on—before you actually need them. Essentially, you will be taking assets within your estate subject to creditors’ claims and repositioning them as exempt assets, therefore out of reach of creditors.

How Asset Protection Plans Fail

You cannot decide to start asset protection when a judgment creditor is already in the picture. Each state has laws that protect these judgment creditors against people who transfer assets from their name with an intent to “hinder, delay, or defraud” a creditor. Courts are not easily fooled by such actions and will order the transfers reversed, with assets turned over to pay the creditor. Because of this, asset protection planning must begin as part of your estate planning months or years before there is even a whisper of a lawsuit against you.

Examine Your Financial and Estate Plans

Before you engage in asset protection, you will first examine your short and long-term financial goals. You will need to determine your current and expected future sources of income, the amount of money you will need to retire, and how much will be left to pass on to your heirs. This results in a detailed financial plan and estate plan. Once you have a solid estate plan, you can then look at your current assets with an eye toward determining whether or not they are exempt from creditors. Assets that are not exempt from creditors may then be positioned so as to protect them from potential creditors. Even assets you intend to acquire in the future can potentially be protected in this manner.

Asset Protection Involves Long-Term Goals

It is extremely important to look at asset protection planning as long-term planning. You cannot protect assets quickly, when necessary or as a temporary fix to a problem. One way to look at asset protection is to think of it as taking assets “out of play,” so to speak, in times when your finances are doing well. This is akin to taking chips you win off the poker table, and only playing with the money you came with, ensuring you never lose more than you could afford. This ensures solid protection of your valuable assets from potential creditors.

Avoid Any Hint of Fraudulent Transfers

While you want to protect your assets, you also want to avoid any hint of fraud.  Anything you do to protect your assets after a claim has already begun can and will be undone under the fraudulent transfer law. The point at which a claim arises is typically much earlier than you might think. In other words, by the time you receive a demand letter, or a process server knocks on your door, it is much too late to protect your assets. Further, the actual process probably started a considerable length of time before you received such a notification. 

If you attempt to protect or transfer assets after a claim has arisen, you are only making matters worse. Lest you think that you should at least try to protect your assets after a claim has arisen—after all, the worst that could happen is that the judge reverses the transfer—think again. You, as well as anyone who assisted you with the transfer, can end up liable for the original debt and the creditor’s attorney fees. The may rule out future discharge of the debt, as well.