Caution: Your Traditional Asset Protection Plan Is Set Up to Fail

You may be surprised to learn that not only has asset protection planning been around for a long time, but you are likely to have already engaged in it at some point. In fact, you probably have one or more types of traditional asset protection planning currently in place. The problem is, in many cases, the type of planning you have right now may not be enough to fully protect you and your family.

What Is Asset Protection Planning?

Asset protection planning is the positioning or repositioning of assets to preserve and protect your property before a claim or the threat of a claim. In other words, this type of planning will not be effective in shielding your money and property from an existing claim. Instead, it must be done long before there is even the hint of a claim. If you transfer money or property in an attempt to shield it from existing creditors, it could be considered a fraudulent transfer and result in legal penalties.

Asset protection planning aims to provide an incentive for settling a claim, improve your bargaining position, offer options when a claim is asserted, and, ultimately, deter litigation.

What Is Traditional Asset Protection Planning, and Why Does It Often Fail?

Several types of traditional asset protection planning have been around for years. The most common is liability insurance—automobile, homeowner’s or renter’s, personal property, umbrella, officers’ and directors’, malpractice, and the like. You probably have at least one liability policy in place right now. Unfortunately, liability insurance may encourage a lawsuit since it can be perceived as “easy money.” Aside from this, liability insurance often fails because the coverage is inadequate, the policies have extensive exclusions, or the carrier becomes insolvent.

Another common type of traditional asset protection planning is the use of a business entity, such as a corporation or a limited liability company, to segregate business accounts, property, and liabilities from personal accounts, property, and liabilities. However, while a legally formed business entity may shelter your personal accounts and property from a lawsuit filed against the company, the opposite is not true—if you, as the owner of an interest in a company, are personally sued, your ownership interest in the company may not be protected from a judgment entered against you. In addition, your personal accounts and property could be vulnerable to a judgment entered against the company if your company fails to observe certain formalities.

The final common type of traditional asset protection planning is established under state law and allows residents to exempt specific accounts and property from creditors’ claims. This exemption may include protection for property owned jointly by spouses (tenancy by the entirety ownership), a primary residence (protected homestead), the cash value of life insurance, investments held in a retirement account, and annuities. Nonetheless, these state exemptions are often subject to limitations, such as a cap on the value or land area of the protected homestead.

What Should You Do?

You may think that only wealthy people need to do advanced estate planning focused on asset protection. However, anyone who has accumulated any amount of wealth can be sued. The only way to fully protect yourself and your loved ones is to adopt more advanced forms of asset protection planning, such as irrevocable trusts and sophisticated business structures.

We can help you go beyond traditional asset protection planning by creating a comprehensive plan tailored to your unique family situation and financial status. Please call or email us at (408) 371-6000 or info@SowardsLawFirm.com to set up a consultation.