Q & A on Asset Protection Planning

By: Anthony L. Barthel

What is asset protection planning?

Asset protection planning creates a structure for responses to a personal financial catastrophe or exposure to liability. Appropriate asset protection plans are developed during times of affluence or wealth building. The plan allows individuals and companies the ability to weather storms and settle claims in a timely and cost efficient manner. Asset protection planning separates and insulates various investments and holdings from the others, thereby reducing exposure to risk. Asset protection planning and execution can have the similar effect of removing cancerous tissue from an otherwise healthy body or removing a spoiling item to save the whole. Despite all of the advantages of asset protection planning, it does not serve as a substitute for adequate insurance.

I just received a lawsuit, can I engage in asset protection planning?

Yes and no. Certain statutory limitations, for example the Bankruptcy Code and the Uniform Fraudulent Transfers Act, limit the transfer of assets in anticipation of certain events. Even so, given your unique circumstances, there are certain strategies that can be employed to preserve wealth in the midst of litigation. During “high-stakes” litigation, a focus on current business operations should be explored, together with alternative operational models to lawfully limit the exposure of assets available to creditors.

What is a “partnership styled” entity and how does it protect my assets?

A “partnership styled” entity that has the ownership characteristics of a partnership, for example a Limited Liability Company (LLC), Limited Liability Partnership (LLP) and Limited Partnership (LP). Because of centuries-old legal precedent, owning assets in a partnership prohibits creditors from exercising control over the business and allows friendly parties to determine when and how the creditor can satisfy its judgment. Unlike corporate stock, the ownership interest in a partnership styled entity may not be seized by a creditor. The creditor’s sole and exclusive remedy is to seek a “charge order” from a court. A charge order entitles the creditor only to distributions from the entity. If no distributions are made, the creditor receives nothing. In addition, it is possible that the creditor will be responsible to pay for a portion of the taxes on the income from the entity, even though the creditor never received any distribution.

Should I hide my identity?

Most everyone has heard the “infomercials” or attended investment conferences extolling identity anonymity schemes, such as Nevada corporations. Creditors and their attorneys ultimately reveal identity and little strategic gain is made by employing this strategy. Rather than bank on identity protection, the more prudent and sophisticated approach is to carefully tailor your plan with a group of qualified professionals.

I’ve been approached to place assets offshore, should I do this?

Placing your assets or investments offshore is a complex and expensive adventure. For extremely wealthy individuals, these strategies have merit. Further, because of the sheer value being handled, these persons can afford the steep transactional and professional fees associated with its implementation. When considering this type of planning, seek competent advice. The vast majority of small business owners will find superb asset protection mechanisms available right in Minnesota – provided foresight and good judgment is utilized.