Asset Protection Part 1
By: Christopher L. Rogan, Esq.
The term asset protection often evokes visions of high rollers and Swissbank accounts or, on the other end of the spectrum, bankrupt deadbeats tryingto avoid their just debts and obligations. While asset protection may, for some, involve off-shoreaccounts or trusts and other more exotic means of removing assets from thereach of creditors, such approaches are often well beyond what is typicallyrequired to achieve a reasonable level of security. Likewise, asset protection is largely ineffective (and insome cases illegal) for those teetering on the banks of or already in insolvency. Instead, asset protection is mostappropriate for individuals who have achieved or are in the process ofachieving some degree of financial success and who are accumulating assets withwhich they would prefer not to part in the event of some unforeseen future financial setback, lawsuit orliability.
Some discount the need for personalasset protection as unnecessary as they mistakenly believe that their "modest"wealth would never be a target of an aggressive creditor or opportunisticplaintiff. Moreover, they havealways paid their bills on time and expect to continue doing so in thefuture. However, asset protectionis not simply about avoiding debts voluntarily incurred. It is, instead, intended to account forthe unexpected - whether that a business failure, medical catastrophe, automobileaccident or lawsuit. Regardless ofyour credit score, good intentions and past business and financial success, ifyou are an owner, officer or director of a business, if you have employees, ifyou own a home or rental property, or if you drive a car, or, worse yet, have ateenage driver in the home, asset protection is something you should consider.
Unfortunately, the days when onlybig multi-national companies needed to fear being sued for millions becausetheir coffee was too hot or their addictive products proved habit forming are inthe past. When a judge tries totake his local mom-n-pop drycleaner to the cleaners for $54 million over a pairof lost slacks, there is need for concern. An ever growing number of people see lawsuits as little morethan a lottery - one in which, statistically speaking, a plaintiff's odds aremuch better than winning the Power Ball or Mega Millions and the potentialjackpot is as great or greater. Asprospective plaintiffs understand that, in American, anyone can sue anyone foralmost anything and, more importantly, that "you've got to play to win," theyare playing and filing lawsuits in record numbers. Whether or not a lawsuit is valid, the defendant must expendsignificant amounts of time and money to defend against and deal with the suit,and is still left crossing his fingers when the trial date arrives.
However, plaintiff's counsel (especiallythose with a contingency fee arrangement) will often investigate potentialdefendants' asset-base prior to filing a lawsuit to determine the likelihood ofcollecting on a judgment if obtained. If a prospective defendant is deemed "judgment proof" - meaning that hehas no assets or that he has no assets thatcan be reached by the creditor - the incentive for filing a lawsuit is significantlyreduced. Even if a suit is filed and a judgment obtained,prior asset protection can encouragea favorable settlement of the judgment amount.
Simply stated, asset protection isthe process of creating as much distance between your assets and potentialcreditors as is reasonably possible. This can be accomplished through a number of methods depending upon theindividual's particular assets, marital status and levels and nature offinancial and legal risk. Assetprotection will not eliminate the risk of attachment or loss of your assetsentirely, despite the claims of the various asset protection websites andmarketers. The only way toguarantee that your assets can not be taken, is to not own any assets, anapproach which obviously cuts against the goal of protecting your assets. In some cases is it possible to increase the level ofprotection by giving up some control over the assets. The strategic balance to be stuck then, is between controland protection.
The most important aspect ofasset protection is timing. By thetime many people begin to understand the importance of asset protection, it istoo late. Virtually every stateprevents debtors from making transfers or taking other actions to "hinder,delay or defraud" creditors. Such "fraudulent conveyances" are easily unwound or "avoided." Even transfers from oneself tooneself and a spouse (such as the retitling of a transfer of a house from onespouse to both spouses) is avoidable, if accomplished after the debt inquestion was incurred. However, transfersand other asset protection steps undertaken priorto the incurrence of the claim or debt at issue, normally can not be setaside as fraudulent.
In a future article, I willdiscuss the most essential asset protection steps that individuals and businesspersons should employ to achieve a reasonable level of asset protection.
Christopher L. Rogan, Esq. is an attorney with the law firm of CampbellMiller Zimmerman, P.C., located in Leesburg, Virginia. The information provided in thisarticle is general in nature and is not intended nor provided as legal adviceand should not be relied upon as such or utilized as a substitute forprofessional service and advice in specific situations.