Asset Protection Overview
The underlying goal of asset protection is to render an individual effectively “Judgment Proof” while still maintaining a certain standard of living. In other words, even if sued and adjudicated liable for monetary damages, a person whose assets are properly protected would be incapable of paying any resulting judgment. (i.e., “judgment proof”).
A person who is judgment proof can evade liability in two ways:
- Would be plaintiffs usually elect not to sue judgment proof individuals, noting that the cost and inconvenience of litigation simply isn’t worth obtaining a judgment that they cannot collect.
- Even if a plaintiff chooses to incur the cost and inconvenience of suing a judgment proof individual, and successfully obtains a court judgment, the plaintiff still lacks any means of actually collecting on the judgment.
As you might have gathered, some people are naturally judgment proof. For example, a twenty-two year-old college student, who owns nothing, has no job and owes tens of thousands of dollars in student loans, is probably judgment proof. That college student probably has no need for an asset protection strategy.
However, most of us are not judgment proof. Most people, even those of us who aren’t high-powered executives, have some level of liability exposure. For instance, if we just slightly adjust our example of the jobless college student, we can see how even modest earning power or owning simple assets can convert a person from judgment proof to a target for litigation. If, for instance, our college student lands an entry level job as a sales associate at a local retail store, then his wages may be susceptible to garnishment (most states allow wage garnishments equal to about 25% of your pay). Or, let’s imagine that our college student has received a new car as a graduation present; the car is likely an asset that can be seized to satisfy a court judgment (most states allow modest exemptions for automobiles, but those exemptions are typically much lower than the cost of a new car).
Asset Protection: Approaches
Asset protection strategies are varied; and determining the best asset protection strategy for you depends on your individual situation. Even though there are a host of law firms, trust companies, wealth managers and other professionals and psuedo-professionals peddling a laundry-list of “asset protection” products, all asset protection strategies can generally fit into the following seven (8) categories:
- Living Within the Exemptions
- Using the “Corporate Veil”
- Using the “Limited Liability” in Limited Liability Company
- Partnerships of the Limited Variety (LPs, LLPs, LLLPs)
- Strategic Transactions
- The Offshore Trust
- The Domestic Asset Protection Trust
- Complex Combinations and Layering.
Below, we have begun to discuss each of these issues in more detail. We will be updating the discussion over time, so please check back for more information as we supplement this overview of asset protection.
Strategy 1: Living Within the Exemptions
Each state has a series of bankruptcy exemptions. This is basically a list of standard possessions and income that the state has determined its citizens must be permitted to retain, regardless of their level of indebtedness. Basically, these exempt assets are what you are allowed to keep if you ever were to claim bankruptcy. If a creditor is pursuing you, that creditor is generally prohibited from garnishing, seizing or otherwise taking away any assets or income from you in excess of those bankruptcy exemptions. Some states offer generous exemptions, while other states are less forgiving. For instance, in Nevada, you can homestead your personal residence and protect up to $550,000 in home equity. Meanwhile, in Alabama, the homestead exemption only protects up to $10,000 in home equity (and that is only for a married couple; single persons receive even less protection).
Regardless of where you live, the basic strategy of “living within the exemptions” is the same. The idea is to reallocate your personal wealth so that it fits neatly within the allowances that your state provides. For instance, in Nevada, you are allowed to keep up to $1,000 in cash, $5,000 in jewelry and one gun. So, if you live in Nevada and have $8,000 in your bank account, you can “live within the exemptions” by buying $5,000 in jewelry and a $2,000 rifle.
As you might have guessed, this strategy means a huge adjustment in your lifestyle and can even border on the absurd. This is a strategy for a crazy person. Just imagine that weird guy living in a cabin in the woods, who rants and raves about how he “lives off the grid”. This is the strategy for that guy. Most of us, want a higher standard of living.
Strategy 2: Using the Corporate Veil
Corporations can, in certain instances, be a useful asset protection tool; but using the corporate structure as an asset protection vehicle has serious drawbacks that you need to be aware of.
A corporation is a separate legal entity created under state law, having its own separate privileges and liabilities distinct from those of its shareholders. A key feature of the corporation is the concept of the “corporate veil”. The “corporate veil” is a legal barrier between the corporation and its owner. The basic concept is this: the debts and liabilities of the corporation belong solely to the corporation and do not extend to the shareholders.
As a asset protection tool, the “corporate veil” can help separate one’s liabilities from one’s asset.