Asset Protection Fundamentals – Part I

What is asset protection?
Asset protection is any strategy, tool, or action to protect, preserve, or enhance one’s assets.  It is not only for the wealthy people. Every family should have an asset protection plan (APP).  Although the extent and detail of the plan may vary from one family to the other, every family should have one in place to preserve its earned assets.  Reasons include:

  1. Lawsuits, e.g., lawsuits against McDonald: “Hot Coffee” case, “You didn’t warn me I’d get fat!” cases
  2. Divorce
  3. Bankruptcy
  4. Catastrophic illness

When is the time to start asset protection?
According to commentators, there are five maxims to this question,

  1. Sooner is better
  2. Something is better than nothing
  3. If it’s too good to be true, it probably is
  4. Segregate assets
  5. Do not hinder/defraud one’s creditors

What is the process for setting an asset protection plan?

  1. You will need to fill the Personal Information Form (PIF)
  2. Attorney will analyze the PIF to determine your net worth,  potential risk, and liabilities
  3. Attorney will then conduct a preliminary solvency analysis
  4. A plan is recommended for implementation

What are the tools/ strategies for protecting assets?

  1. Proper assets titling, including assets beneficiary designation.  You should also make sure that title to an asset matches with the property insurance on that asset.
  2. Insurance: obtain and utilize proper insurance is another fundamental tool in asset protection.  Depending upon you occupation, health, business, and family status, there are many types of insurances can meet your risks and/or potential risks.  But be aware that insurance companies can and will deny coverage for certain claims.
  3. Transfer assets to a spouse or relatives: this is another common strategy.  You can transfer assets to your spouse or relatives (including children) who are less “at risk.”  Under Ohio law, transfer could be a gift.
  4. Prenuptial agreements: it is valid in Ohio and if properly drafted, can be an excellent tool for asset protection.
  5. Exemptions: exemption planning utilizes state and/or federal statutes and laws to protect assets.  There are several important ones:
    1. Residential exemption
      Why did O. J. Simpson take up residency in Florida after his famous trial?  Because Florida has an unlimited homestead exemption.  In Ohio, residential exemption is $20,200.
    2. Life insurance exemption
      A more powerful exemption under Ohio Law is the cash value of life insurance, which is completely exempted and protected so long as certain rules are followed and certain beneficiaries are designated.
    3. Annuities
      Annuities can also result in the total cash value being exempted, but it needs to be properly structured and designated to certain beneficiaries.
    4. Retirement plans
      There are many retirement plans, such as ERISA plans, Keogh and other corporate plans, SEPs and SIMPLE IRAs, IRAs, etc.
  6. Using holding companies.  Trustees are given power to drop all assets into a LLC (Limited Liability Co.) or LP (Limited Partnership). In general, LP statute, Revised Uniform Limited Partnership Act (RULPA) is not as protective as LLC statutes, but LLCs are state specific. Ohio LLCs are not very protective because creditors can get “charging order” on debtor’s membership interest.
  7. Expatriation: domestic or foreign.  While transferring fund out of state means no local garnishments, creditors can still learn about out-of-state account and ask court to order debtors to repatriate funds.  Transferring fund oversee is harder for creditors, but it involves expenses on debtor.
Call Now Button