Find answers to common asset protection questions and learn how to avoid exposure to litigation:

It’s all About the Planning: - click to expand
Introduction, p. 2:

Successful asset protection planning is highly dependent on proper implementation before facing creditor claims. The key to an effective asset protection plan is the planning. Once an event of liability has occurred, or a claim has been lodged, protective strategies become unavailable.

Why pursue asset protection planning? - click to expand
Introduction, p. 5:

The justification for asset protection is illustrated by the case evaluation methods of the trial attorney. Trial attorneys (typically practicing personal injury or products liability law) pay the costs of litigation (with the intention of sharing in the judgment collected by the client). Trial attorneys are the street fighters of litigation, seasoned in summing-up a defendant and calculating the risks and rewards of entering the ring. When a trial lawyer is presented with a potentially insolvent, uninsured or asset protected defendant, the pugilist will generally pass on risking the time, energy and money necessary to win a likely uncollectible judgment. Trial lawyers intimately understand that the merits of a lawsuit will not pay the legal fees.

Statutory Exempt Assets: - click to expand
Chapter 1, p. 13:

Federal and state “exemption” statutes independently protect certain assets. Such statutes require no special trust or ownership structure. The more precise the statutory protection, the lower the likelihood of judicial “legislation.” For example, if a state protects the cash value of life insurance held by its residents, it may not be clear that the protection extends to “variable universal” life insurance. In a case where a judge feels it unfair to shield an asset from a legitimate creditor, even the slightest ambiguity in protective language could be construed against the debtor.

Chapter 4, p. 36:

Depending on the state, protected assets may include the value of the home, farm, life insurance, annuities and retirement accounts. Federal law also protects certain retirement and other assets from attachment by creditors (even in bankruptcy). Given that exemption statutes insulate particular assets, judicial activism (based on the court’s “interpretation” of a statute) is rare.

Bankruptcy: - click to expand
Chapter 2, p. 18:

The federal bankruptcy process generally provides a means of discharging indebtedness owed by an insolvent debtor. The assets of the debtor become the property of the “bankruptcy estate,” paid to creditors, based on rules of preference. The debtor seeks the discharge of all debt and exposure of as few assets as possible to creditor claims. Assets protected by federal or state law are exempt from collection in bankruptcy. However, if the state of the debtor’s residence “opts out” of federal exemptions, only state (and not the federal) exemptions apply.

Assets Exempt from Bankruptcy Claims: - click to expand
Chapter 4, p. 72:

The federal government excludes certain additional miscellaneous assets from attachment in bankruptcy. As the protections only cover the basics, they are not generally useful to protect wealth. Examples of such exemptions include the following…

How does a Spendthrift Trust work? - click to expand
Chapter 3, p. 24:

The practice of appointing a third party to control assets for a beneficiary has evolved into a legal arrangement known as the “spendthrift” trust. A spendthrift trust prevents the beneficiary from selling or assigning his interest in trust income or principal. Spendthrift trust assets may be distributed to a trust beneficiary, but only pursuant to the terms of the trust. The beneficiary holds no legal title to trust assets. The beneficiary has no right to manage, spend, transfer or encumber trust assets. The beneficiary’s interest in trust assets or distributions may not therefore be transferred (either voluntarily (to a purchaser) or involuntarily (to a creditor)).

Is my homestead protected? - click to expand
Chapter 4, p. 40:

If the debtor is not a resident of Florida, Iowa, Kansas, Oklahoma, South Dakota, or Texas, the homestead exemption is limited (subjecting the home to attachment and sale). Any existing mortgage is first paid. Any sales proceeds exceeding the mortgage are paid to the debtor, but only to the extent of the homestead exemption. Any remaining equity is available to the creditor. Sheltered proceeds from the sale of homestead property must typically be reinvested in an exempt asset to remain protected.

Can creditors garnish my wages? - click to expand
Chapter 4, p. 52:

Similar to the homestead exemption, the wage exemption varies dramatically from state to state. Several states, such as Delaware and Alabama, protect only a portion of wages. Other states, such as South Carolina and Texas, exempt all wages from judgment creditors of the earner.

Is my life insurance protected? - click to expand
Chapter 4, p. 57

Several states and the U.S. government support life insurance planning by exempting cash values and proceeds from creditor claims. The debtor may act as one or all of the three basic policy participants (i.e., owner, insured and/or beneficiary). Typically, the protected interest is the beneficial interest (supporting family income and liquidity).

Tenancy by the Entirety: - click to expand
Chapter 4, p. 73:

Tenancy by the entirety with rights of survivorship (“TBE”) is one of three forms of joint property ownership. Available only to married couples, TBE provides legal protections not available to tenants in common or joint tenants (the other two forms of joint ownership). As long as the marital “entireties” of TBE are maintained, each spouse legally owns the entire TBE property.

Fraudulent Transfers: - click to expand
Chapter 5, p. 81:

It is a common misconception that an individual may legally transfer valuable assets to a friend or relative to avoid attachment by a creditor. Understanding why people seek to avoid collection requires no imagination. Reactionary transfers, however, serve no legal purpose.

Choice of Entity: - click to expand
Chapter 6, p. 104:

Entities are available to anyone, provided that certain organizational and maintenance requirements are satisfied. For instance, a universal requirement of corporations and LLCs across the globe is that each establish and maintain a “registered agent” in the jurisdiction of organization (to receive legal service). Once the entity is organized in the desired jurisdiction, the residency of the owner or beneficiary should become irrelevant to the protections offered by the entity.

What is judicial jurisdiction? - click to expand
Chapter 6, p. 109:

A court’s “jurisdiction” is defined by the geographical scope of its power, based on the applicable state or federal constitution. A U.S. court cannot enforce a U.S. judgment by attaching property held outside the geographical limit of its power. Without jurisdiction, domestic courts cannot reach foreign property or control foreign trustees/managers to satisfy U.S. debts.

Avoid Bankruptcy and Limit Control of Trust Assets:  - click to expand
Chapter 6, p. 134:

To avoid judicial intervention, bankruptcy should be avoided. Offshore trusts should (i) be formed and funded on a “sunny day” long before debt is incurred or expected (to avoid the specter of fraudulent transfer) and (ii) limit the grantor’s access to trust assets. If the debtor controls distributions, he or she may face jail time for refusing to repatriate trust assets. Foreign trusts should irrevocably place assets abroad and at the discretion of an offshore trustee who is prohibited from compliance with a U.S. repatriation order.

LLCs and Partnerships: - click to expand
Chapter 7, p. 154:

All fifty states and several foreign jurisdictions offer partnerships and limited liability companies. LLCs and partnerships provide “outside” asset protection. Unlike corporate stock, which may be attached by any creditor of a shareholder, equity held in a protective partnership or LLC cannot be reached by a creditor of an owner. An “outside” creditor (of a member or partner) cannot acquire a voting interest or any assets of a protective LLC or partnership. However, the strength of the applicable organizational statute will determine the degree of outside protection.

Should I consider using an exotic entity? - click to expand
Chapter 6, p. 115:

An exotic entity will discourage (and often completely frustrate) a trial or collection attorney pressured to find payment in as little time as possible. The smaller the potential recovery, the less time and resources the plaintiff’s lawyer can gainfully devote to attempting to earn his percentage of the judgment. Small judgments involving assets held in a protective entity (especially a foreign entity) are often abandoned before the attorney would even consider researching the strength of the applicable protections.

Can I avoid the IRS by holding foreign assets? - click to expand
Chapter 8, p. 193:

The IRS routinely exchanges financial information with its tax treaty partners. Such information typically involves passive income and bank account deposits by Americans in the foreign country. For example, regular bank deposits by a U.S. resident in a treaty country will likely be disclosed by the foreign treaty partner and processed by the IRS Service Center in Bensalem, Pennsylvania.