In general, there are two negative situations asset protection seeks to minimize. The first is bankruptcy. Here, planners work with the bankruptcy code to help clients survive bankruptcy. However, it’s important to realize there is only so much a planner can do in this area. The bankruptcy code exemptions are very clear — and also fairly limited. The second negative event planners work at minimizing is litigation. Here we have far more flexibility (so long as there are no fraudulent transfer issues). By using various structures, it is possible to greatly reduce the negative impact of litigation. Other events that are considered in the plan are divorce (both of the client and the client’s children) death (but this falls more under estate planning) and incapacitation.
It’s also important to understand what asset protection isn’t. Asset protection cannot create a bullet proof strategy that is unassailable in all situations – and don’t let anyone tell you differently. The most striking example is bankruptcy; as mentioned above, the bankruptcy exemptions are very clear and very narrow; anything that falls outside them is swept up in the bankruptcy estate to pay creditors. In addition, if a person does not maintain the plan, trouble can emerge. For example, a person that forms a corporation that does not keep up with corporate formalities could have the court “pierce the corporate veil,” meaning the person will become personally liable for the claim.
Who Should Engage in Asset Protection?
All businesses should have an attorney who specializes in asset protection look at the overall business structure at least once every few years to make sure their overall structure provides maximum protection. In addition, all high net worth individuals (people with at least $1 million in net worth) should have a plan in place, as their wealth is a natural litigation target. There are also several professions that naturally benefit from asset protection planning. Doctors lead the pack, followed closely by other licensed professionals (accountants, lawyers and engineers etc..).
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The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.