Experienced Sacramento Asset Protection Attorneys
What is Asset Protection?
Asset protection is based on the basic principle that any asset owned by a person (with some minor exceptions, like an ERISA-qualified retirement plan) can be reached by that person’s creditor. Asset protection sets as its goal the concept of removing assets from a debtor’s legal ownership, while retaining control and beneficial ownership. Over the years, numerous legal structures have been developed to split up legal title to assets from control and beneficial enjoyment.
There are literally dozens of various asset protection structures in use today. The specific structure best suited for each person will depend on: (1) the nature of the asset being protected (i.e., different structures are used to protect rental real estate, a personal residence, a bank account, a retirement plan, etc.); (2) the timing of the claim or lawsuit; (3) the debtor’s risk adversity; and (4) the aggressiveness and the intelligence of the creditor or their attorney.
Asset Protection Options
For example, when seeking to protect a personal residence, there are several different options which may include;
- Transferring ownership to a living trust with a generic name (fairly simple and not likely to defeat the claims of most creditors)
- Transferring ownership to an irrevocable trust
- Encumbering the residence by borrowing against it
- Recording a naked deed of trust
- Selling the residence on an installment basis to a family member
- Selling for cash to a third-party
It is critical to engage in asset protection planning before there is any need for it. Engaging in during or after-the-fact asset protection planning may be deemed to be a fraudulent transfer allowing the creditor to set aside the planning.
The term “asset protection” is commonly misunderstood. Many believe that it refers to the techniques used to shield a debtor’s assets from creditors’ claims. Because it is impossible to “bulletproof” a debtor, asset protection involves structures and techniques that make it more difficult and expensive for a creditor to reach a debtor’s assets. The objective is to change the creditor’s economic analysis, making the pursuit so difficult and expensive, the creditor will either give up or be willing to negotiate on terms more favorable to the debtor.
Asset protection is not about secrecy or hiding assets. Hiding assets is an ineffective means of shielding them from creditors because a debtor would usually have to disclose his assets in a debtor exam, under penalty of perjury. A properly structured asset protection plan allows the debtor to reveal the nature and the structure of the plan without sacrificing its usefulness.
Theory of Asset Protection
The general proposition underlying asset protection is that a creditor can reach any asset owned by a debtor (with some statutory exemptions like the homestead exemption and certain types of retirement plans), but cannot reach assets not owned by the debtor. Consequently, the focus of all asset protection planning is to remove the debtor from legal ownership of assets, while retaining the debtor’s control over and beneficial enjoyment of the assets. Asset protection that works must be very practical. The planning is done within a statutory framework, but it is the practical implications of the planning that shape the exact nature of the structures and techniques. For example, a creditor may be able to make a successful legal argument that a given structure should not stand, and thus be able to retrieve the debtor’s assets. But, if making such an argument will be sufficiently expensive and time consuming, the creditor may never make it.
Which Asset Protection Option is For Me?
Several different factors determine the nature and the type of planning that should be used for a given client. The three most important factors are: (i) the identity of the creditor pursuing the client, (ii) the nature of the assets that will be pursued by the creditor, and (iii) the extent to which the debtor is willing to go to protect his assets. The identity of the creditor refers to how aggressively the creditor will pursue the debtor’s assets, and how knowledgeable the creditor is about debt collection laws. The more aggressive and knowledgeable the creditor, the more obstacles we need to erect in their path. The nature of the assets refers to the specific assets owned by the debtor. There is no “magic bullet” asset protection strategy; different structures are used to protect different types of assets.
The extent to which the debtor is willing to pursue asset protection is important in determining the appropriate strategy. Some debtors may be willing to do nothing more than shuffle paper agreements, whereas others may be willing to go through a divorce, move assets offshore or sell their home.
All asset protection planning implicates income, transfer and property tax issues, and fraudulent transfer laws. Assume the debtor is facing a significant lawsuit risk with a large anticipated judgment. The debtor has two asset protection choices: (i) do nothing and stand to lose all assets when the plaintiff becomes a creditor, or (ii) engage in some asset protection planning. Because the common downside of a fraudulent transfer is the creditor’s ability to set aside the transfer, a debtor may have nothing to lose (other than the transaction costs) by engaging in planning that may or may not later be deemed a fraudulent transfer. From a creditor’s perspective, a successful fraudulent transfer challenge gives the creditor the legal right to pursue the transferred assets. Having a legal right to do something does not mean having the actual ability to do so, and does not mean that the pursuit of the transferred assets would be cost effective.
Again it comes down to road blocks, the more there are, the more successful an asset protection strategy may be. The transaction costs can be costly depending on the option chosen, however so can losing that asset if nothing is done.
Personal Residence
No asset is more important to shield from creditor claims than a personal residence. Personal residences represent the bulk of many people’s fortunes, and have great sentimental value. Creditors do not pursue the residence itself, but the equity in the residence that can be converted into money through a foreclosure sale of the residence. There are two equity stripping techniques. One way to strip out the equity is by obtaining a bank loan. Even if we assume that a bank would lend an amount sufficient to eliminate 100% of the equity, the cost of this asset protection technique is staggering. A $500,000 loan bearing a 7% interest rate, costs $35,000 per year.
There are a few other options in protecting the personal residence including the use of a qualified personal residence trust (QPRT) which is an irrevocable trust with spendthrift clauses. For more information please contact our firm to schedule a consultation to discuss your Sacramento Asset Protection needs.
Rental Real Estate and Other Non-Liquid Investments
Some of the techniques discussed above protect rental real estate, businesses, intellectual property, collectibles or other valuable assets. These assets may be transferred into irrevocable trusts, sold for cash or on installment basis or encumbered.
Irrevocable trusts that are not grantor trusts are not the answer for income-producing assets because of adverse income tax results. To the extent the debtor-settlor retains an interest in the trust, the trust will be deemed self-settled and will not offer the debtor any asset protection. The other techniques face challenges similar to the ones discussed above.
LLCs and limited partnerships are another protection vehicle with some risks and challenges. Most creditors do not want to play the waiting game, and would prefer to settle for a sum certain today, than wait for a possible distribution (if they were able) from an LLC or a limited partnership.
Liquid Assets
Liquid assets may be protected through many of the techniques described above, including LLCs, limited partnerships and irrevocable trusts.
Many debtors believe that simply moving money to an offshore bank account will serve as sufficient protection from creditors. While the creditor may have a difficult time enforcing its judgment in a foreign country and levying on a foreign bank account, the debtor will never have a problem withdrawing the money if the account is directly in the debtor’s name. Consequently, the creditor may petition the court for a turnover order, which would direct the debtor to withdraw the money from the foreign account and pay it over to the creditor.
If you are in need of an asset protection strategy it is best to do it before you need to. Please contact us before you have to.
Contact Our Experienced Sacramento Asset Protection Attorneys
We are experienced Sacramento Business Law Lawyers. We have helped many individuals and companies with their business planning and incorporation needs. Our business lawyers offer affordable business formation and business incorporation packages and great advice and strategy regarding business law, asset protection, buying or selling a business, business disputes, contract drafting, and annual corporate requirements. Our business law lawyers can help you protect your personal assets and give you the great legal advice and strategy needed to get you the results you want. Contact us today to schedule your complimentary attorney consultation by clicking HERE or by calling 916-999-1376. We look forward to helping you with all of your Sacramento business law needs.
