August 01, 2010
Asset protection is the process of re-tooling the estate to minimize the devastation that will take place if the client is hit with a catastrophic lawsuit. This is done before the action that would create such a lawsuit takes place, thus making the transactions completely legitimate and legal and avoiding the claim of making fraudulent transfers.
Business entity planning allows a client to separate business assets from personal assets. By creating corporations, limited liability companies, and limited partnerships, acts that arise from business activities will result in only business assets being vulnerable to a catastrophic lawsuit. This shield can be effective for business activities, but will not create a shield over business property in case the lawsuit arises from personal activities. Furthermore, such entities require proper maintenance to be effective. Clients must maintain separateness, follow formalities, and properly capitalize the business to anticipate paying off foreseeable lawsuits. Capitalization can be done with hard assets or the purchase of liability insurance.
A domestic asset protection trust is an irrevocable trust that will give lawsuit protection to assets held within the trust. In recent years many jurisdictions such as Alaska, Delaware, and Nevada have changed their laws to allow for the creation of these trusts. A client merely transfers assets into the trust and a trustee in the out-of-state jurisdiction controls the distributions of such assets according to a liberal standard. Jurisdictions such as Nevada allow the use of a cotrustee for distribution purposes which provides security in these situations. Although these trusts have not been fully litigated in the court system as of yet, they show great promise as a highly effective asset protection tool.