Asset Protection Planning

By Olivia H. Stoner, Esquire, CFP®
Email: ostoner@foleythompsondews.com

Asset protection is becoming an increasingly important issue in our litigious society. All of us have exposure to potential creditors. You can have exposure due to the assets you own; or because you cannot shovel the sidewalk in front of your home and your neighbor slips and breaks a hip; or because you own a rental property and the roof collapses.

You can have exposure due to your employment. You may be a physician whose patient has a bad outcome and whose family believes you to be responsible; or you may be an accountant who signed off on a company’s fraudulent audit.

You can also have exposure from ordinary everyday acts. Perhaps you do not see that the traffic light has turned red and you cause an accident; or you let go of your shopping cart to answer your cell phone and the cart rolls down the hill hitting a baby stroller.

There are countless unimaginable risks. But, there are ways to manage and minimize these risks. A corporation or other entity can protect you from liability arising from rental property or other assets; and you can get insurance to protect against the most significant risks. Auto and homeowner’s liability insurance can provide insurance up to a certain dollar limit for automobile accidents and home injuries. An umbrella policy can provide additional coverage for multiple risks, such as home, auto, and other risks; and malpractice insurance can provide protection from workplace related exposure.

However, insurance policies have limits, which may be exceeded by a serious claim. It is important to structure your assets to minimize exposure in the event the policy limits are exceeded, or in case you are not insured for the particular risk. Each state has a list of assets that an individual can protect in the event of bankruptcy. In most states, creditors may not attach qualified retirement plans such as pensions and 401k accounts. Life insurance policies may also be exempt. It, therefore, makes sense to fund these accounts with as much as you can afford to contribute as soon as possible. States also typically provide protection for the family home, but generally only a small amount of the equity in your home is protected.

Gifting assets to trusts for children or others may provide some creditor protection. Gifts made far enough in advance of a creditor claim arising are safe from attachment. Typically, the gift must be made before there is a known or foreseeable creditor, but the exact period varies significantly from state to state.

A family limited partnership (“FLP”) may be used to protect your assets. You can transfer your assets into the entity and give the general partnership interest to someone else while retaining limited partnership interests. Only a general partner can force a distribution of assets from the partnership. Because you, as limited partner, cannot force a distribution, neither can your creditors. Unfortunately, while your creditors cannot attach the underlying assets, they can prevent you from getting the benefit of the assets.

Domestic asset protection trusts can be established in the states of Alaska, Delaware, Nevada, Rhode Island, and Utah. Under the laws of these states, you can set up an irrevocable trust with yourself as a beneficiary, even if you do not live in that state. You can gift assets into the trust and a trustee would make discretionary distributions to you. It is not entirely clear whether a judgment in a state that does not recognize the trust would be able to attach assets in a state that allows such a trust. Clearly, such a trust would be an additional hurtle for a creditor to jump prior to reaching their goal: your assets.

Similarly, you can set up an offshore asset protection trust outside the United States, adding more protection and more complexity.

Providing asset protection for your children or others is much simpler than protecting assets for yourself. You can leave the assets in a trust for them, during your lifetime or after your death, and have an independent trustee with the power to make discretionary distributions. Except in rare circumstances, your children’s creditors or ex-spouses would not be able to touch the assets in the trust, providing you with the peace of mind in knowing that the legacy that you have provided for your family will remain in your family.

There are many ways to provide layers of protection for your hard-earned assets, from the simple to the complex. The structure of asset protection techniques to be used must be customized to each person’s personal situation. An estate-planning attorney can help you protect your assets from the many risks in today’s world. For more information, call 215.557.0097 for a free consultation.

It is never too late to plan on purpose.

Olivia H. Stoner is a member of the American Academy of Estate Planning Attorneys and is a partner at the law firm of:
Foley, Thompson & Dews, LLP
2112 Walnut Street, 4th floor
Philadelphia, PA 19103
215.557.0097
Email: ostoner@foleythompsondews.com
Website: www.foleythompsondews.com