Asset Protection Planning
It is important to shield your properties and possessions from future litigation and would be creditors and one of such ways will be to make assets protection plans.
Asset Protection Planning involves protecting your assets from litigation, creditor claims, seizure, and burdensome taxes, whether they are personal or business assets. It organizes financial affairs in such a manner as to safeguard assets from the risk of exposure. It is an essential and entirely legal component of both financial and estate planning.
Asset Protection Planning is a process that considers various factors to determine the appropriate level of security needed for an estate. There are several key tools you can use to achieve the goal of protecting your assets. One is with the aid of a financial advisor who assists you in structuring and organizing your assets so that they are more likely to meet your financial objectives.
It is a misconception that only wealthy individuals need asset protection planning, but in reality, anyone can benefit from it. Regardless of one’s income level, there is always a possibility of facing legal action or being subject to heavy taxation.
However, not everyone can benefit from it, particularly those with little assets and significant debt facing a lawsuit. In such cases, declaring bankruptcy may be a more suitable option than creating an asset protection plan. It is essential to note that certain events like tax liens, mechanics liens, alimony judgments, and child support claims cannot be avoided, and Asset Protection Planning may not be effective in such situations.
Asset Protection Plan protects you from your assets by putting some level of legal separation between you and them.
This legal separation allows you to legally shield your assets from creditors without breaking any laws. The first step to protecting your assets is to transfer them from their unprotected ownership to a protected legal ownership form, such as one or more of the following.
- Family Limited Partnership (FLP): It is a common way to protect your assets, if you want your children to inherit any family-owned businesses or assets, such as real estate, you can set up an FLP.
Typically, an FLP is formed by forming a general partnership and then naming your heirs and family members as limited partners. You’ll still be able to make decisions as the general partner. However, whether they are your children or other relatives, your partners will have a stake in the partnership or own a portion of the assets.
2. Tenancy by the Entirety (TBE): It is a type of joint legal ownership shared by two married people. It is only available in certain states, but those who choose to hold their property in TBE receive certain estate benefits.
Tenancy by the entirety is intended to simplify the inheritance process while also ensuring shared ownership of a property and preserving survivorship benefits. TBE also provides some financial safeguards, shielding property from certain creditors and litigation. Regardless of where the funds to purchase the property came from, both owners in a tenancy by the entirety will hold an equal share of the property. Without the other spouse’s consent, the property cannot be sold or transferred.
3. Asset Protection Trust (APT): An asset protection trust (APT) is a type of trust that holds an individual’s assets in order to protect them from creditors. Asset protection trusts provide the most robust defense against creditors, lawsuits, and judgments against your estate. An APT can even help to deter costly litigation before it starts, or it can positively influence the outcomes of settlement negotiations.
Understanding asset protection isn’t enough. Execution is everything, and there are numerous ways that asset protection efforts can fall short of expectations. Here are some things to keep in mind when it comes to asset protection planning.
- The Time to Begin is Now.
- Keep It Simple and Transparent.
- Don’t Assume That Bankruptcy Will Protect Your Assets.
- Asset Protection Complements Insurance, Not Replaces It.
- Mixing business and personal assets is not a good idea.
- Share Asset Control.
- Transfer Some Assets Offshore.
- Review Your Asset Protection Strategy on a Regular Basis.
Some of the advantages of an asset protection plan are as follows:
- It limits loss.
- It reduces the likelihood of a lawsuit.
- It establishes a Family Legacy
- It provides assurance for end-of-life planning.
- It provides you with a high level of control over your assets.
In conclusion, Asset Protection must occur before any event that may result in a claim against the asset holder in order to remain both legal and ethical. After that time, asset transfers may be considered fraud against creditors. If a creditor can show that the individual made the transfer with the intent of hindering, delaying, or defrauding the creditor, the individual will be held liable. Asset Protection can be costly and complicated, so hiring an experienced attorney is an important part of the process.
References:
- “What Is Asset Protection Planning?”. Smart Asset, accessed 3rd April 2023.
- “Asset Protection- Overview, How It Works, Strategies”. Corporate Finance Institute (CFI), accessed 4th April 2023.
- “10 Considerations for Asset Protection Planning”. CI-Associates, accessed 6th April 2023.
- “What is Asset Protection Planning? 5 Benefits of Asset Protection Planning”. Anderson Advisors, accessed 7th April 2023.
- “Law on Asset Protection in Estate Planning”. Justia, accessed 8th April 2023.
- “What Is Asset Protection Trust (APT)? Definition and Purpose”. Investopedia, accessed 8th April 2023.
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