Asset Protection: One Size Does Not Fit All

Asset protection means shielding your assets from creditors who may go after them to satisfy a judgment or other debt. It’s not intended to help you avoid taxes or other legitimate obligations, but if your professional or personal activities expose you to a high risk of frivolous, unreasonable, or excessive claims, asset protection techniques can help deter claimants who are merely looking for a payoff.

There’s no “one-size-fits-all” asset protection technique. The right strategy for you depends on several factors, including your marital status, the types of assets you own, the nature of the claims you’re concerned about, and the status of potential creditors. It also depends on the extent to which you’re willing to give up control over your assets.

The most common asset protection tools include:

Titling of property.

If you’re willing to relinquish control over property, transferring title to your spouse or another family member can be a simple but effective asset protection strategy. If you’re married and you live in a state that authorizes “tenancy by the entirety,” holding your principal residence or other eligible property in that manner protects it against claims by your or your spouse’s individual creditors.

Trusts.

Placing assets in a properly structured trust can protect them from your creditors, provided the trust is irrevocable. You can also protect the assets from your beneficiaries’ creditors by including “spendthrift” provisions in the trust document, which prohibit beneficiaries from selling or assigning their trust interests voluntarily or involuntarily (in bankruptcy, for example) and by making distributions discretionary on the part of the trustee.

In most states, you’ll lose the benefits of asset protection if a trust is “self-settled” — that is, if you name yourself as a discretionary beneficiary. But a handful of states authorize domestic asset protection trusts (DAPTs), which offer asset protection even if it’s self-settled. If you live in one of these states, a DAPT can be an excellent option. If you don’t, it may be possible to take advantage of another state’s DAPT laws by moving assets to that state and using a local trustee. But uncertainty over the efficacy of this approach makes it risky.

Another option, if you have significant asset protection needs, is a foreign, or “offshore,” trust. These trusts are similar to DAPTs, but they’re established in foreign countries whose laws make it extremely difficult for creditors to enforce a judgment against the assets in such a trust.

Retirement plans.

Don’t overlook the surprising asset protection benefits of qualified retirement plans, such as employer-sponsored 401(k) or profit-sharing plans. So long as these plans are widely available to a company’s employees — rather than just the owners — their assets are generally protected against claims by a participant’s creditors. IRAs also offer limited protection, which varies from state to state.

Entity planning.

An effective way to protect business or investment assets is to hold it in an entity, such as a limited liability company (LLC) or limited partnership. Assets owned by a properly structured and operated entity are generally protected against creditors’ claims, so long as it has a legitimate business or investment purpose (apart from asset protection).

Start Planning Now.

Asset protection planning is only effective if it’s put into place as early as possible. In other words, you must transfer property to a person, trust, or entity, before any actual claims arise or become foreseeable. All states have fraudulent transfer or fraudulent conveyance laws that allow the courts to undo transfers made with the intent to hinder, delay, or defraud existing or foreseeable future creditors.