The term asset protection often evokes visions of high rollers and Swiss bank accounts or, on the other end of the spectrum, bankrupt deadbeats trying to avoid their just debts and obligations. While asset protection may, for some, involve off-shore accounts or trusts and other more exotic means of removing assets from the reach of creditors, such approaches are often well beyond what is typically required to achieve a reasonable level of security. Likewise, asset protection is largely ineffective (and in some cases illegal) for those teetering on the banks of or already in insolvency. Instead, asset protection is most appropriate for individuals who have achieved or are in the process of achieving some degree of financial success and who are accumulating assets with which they would prefer not to part in the event of some unforeseen future financial setback, lawsuit or liability.
Some discount the need for personal asset protection as unnecessary as they mistakenly believe that their “modest” wealth would never be a target of an aggressive creditor or opportunistic plaintiff. Moreover, they have always paid their bills on time and expect to continue doing so in the future. However, asset protection is not simply about avoiding debts voluntarily incurred. It is, instead, intended to account for the unexpected – whether that a business failure, medical catastrophe, automobile accident or lawsuit. Regardless of your credit score, good intentions and past business and financial success, if you are an owner, officer or director of a business, if you have employees, if you own a home or rental property, or if you drive a car, or, worse yet, have a teenage driver in the home, asset protection is something you should consider.
Unfortunately, the days when only big multinational companies needed to fear being sued for millions because their coffee was too hot or their addictive products proved habit forming are in the past. When a judge tries to take his local mom-n-pop dry-cleaner to the cleaners for $54 million over a pair of lost slacks, there is need for concern. An ever growing number of people see lawsuits as little more than a lottery – one in which, statistically speaking, a plaintiff’s odds are much better than winning the Power Ball or Mega Millions and the potential jackpot is as great or greater. As prospective plaintiffs understand that, in American, anyone can sue anyone for almost anything and, more importantly, that “you’ve got to play to win,” they are playing and filing lawsuits in record numbers. Whether or not a lawsuit is valid, the defendant must expend significant 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 (especially those with a contingency fee arrangement) will often investigate potential defendants’ asset-base prior to filing a lawsuit to determine the likelihood of collecting on a judgment if obtained. If a prospective defendant is deemed “judgment proof” – meaning that he has no assets or that he has no assets that can be reached by the creditor – the incentive for filing a lawsuit is significantly reduced. Even if a suit is filed and a judgment obtained, prior asset protection can encourage a favorable settlement of the judgment amount.
Simply stated, asset protection is the process of creating as much distance between your assets and potential creditors as is reasonably possible. This can be accomplished through a number of methods depending upon the individual’s particular assets, marital status and levels and nature of financial and legal risk. Asset protection will not eliminate the risk of attachment or loss of your asset sentirely, despite the claims of the various asset protection websites and marketers. The only way to guarantee that your assets can not be taken, is to not own any assets, an approach which obviously cuts against the goal of protecting your assets. In some cases is it possible to increase the level of protection by giving up some control over the assets. The strategic balance to be stuck then, is between control and protection.
The most important aspect of asset protection is timing. By the time many people begin to understand the importance of asset protection, it is too late. Virtually every state prevents 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 to oneself and a spouse (such as the retitling of a transfer of a house from one spouse to both spouses) is avoidable, if accomplished after the debt in question was incurred. However, transfers and other asset protection steps undertaken prior to the incurrence of the claim or debt at issue, normally can not be set aside as fraudulent.
In a future article, I will discuss 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 Campbell Miller Zimmerman, P.C., located in Leesburg, Virginia. The information provided in this article is general in nature and is not intended nor provided as legal advice and should not be relied upon as such or utilized as a substitute for professional service and advice in specific situations.
Asset Protection Part 1
December 12, 2008
By: Christopher L. Rogan, Esq.
www.cmzlaw.com
The term asset protection often evokes visions of high rollers and Swiss bank accounts or, on the other end of the spectrum, bankrupt deadbeats trying to avoid their just debts and obligations. While asset protection may, for some, involve off-shore accounts or trusts and other more exotic means of removing assets from the reach of creditors, such approaches are often well beyond what is typically required to achieve a reasonable level of security. Likewise, asset protection is largely ineffective (and in some cases illegal) for those teetering on the banks of or already in insolvency. Instead, asset protection is most appropriate for individuals who have achieved or are in the process of achieving some degree of financial success and who are accumulating assets with which they would prefer not to part in the event of some unforeseen future financial setback, lawsuit or liability.
Some discount the need for personal asset protection as unnecessary as they mistakenly believe that their “modest” wealth would never be a target of an aggressive creditor or opportunistic plaintiff. Moreover, they have always paid their bills on time and expect to continue doing so in the future. However, asset protection is not simply about avoiding debts voluntarily incurred. It is, instead, intended to account for the unexpected – whether that a business failure, medical catastrophe, automobile accident or lawsuit. Regardless of your credit score, good intentions and past business and financial success, if you are an owner, officer or director of a business, if you have employees, if you own a home or rental property, or if you drive a car, or, worse yet, have a teenage driver in the home, asset protection is something you should consider.
Unfortunately, the days when only big multinational companies needed to fear being sued for millions because their coffee was too hot or their addictive products proved habit forming are in the past. When a judge tries to take his local mom-n-pop dry-cleaner to the cleaners for $54 million over a pair of lost slacks, there is need for concern. An ever growing number of people see lawsuits as little more than a lottery – one in which, statistically speaking, a plaintiff’s odds are much better than winning the Power Ball or Mega Millions and the potential jackpot is as great or greater. As prospective plaintiffs understand that, in American, anyone can sue anyone for almost anything and, more importantly, that “you’ve got to play to win,” they are playing and filing lawsuits in record numbers. Whether or not a lawsuit is valid, the defendant must expend significant 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 (especially those with a contingency fee arrangement) will often investigate potential defendants’ asset-base prior to filing a lawsuit to determine the likelihood of collecting on a judgment if obtained. If a prospective defendant is deemed “judgment proof” – meaning that he has no assets or that he has no assets that can be reached by the creditor – the incentive for filing a lawsuit is significantly reduced. Even if a suit is filed and a judgment obtained, prior asset protection can encourage a favorable settlement of the judgment amount.
Simply stated, asset protection is the process of creating as much distance between your assets and potential creditors as is reasonably possible. This can be accomplished through a number of methods depending upon the individual’s particular assets, marital status and levels and nature of financial and legal risk. Asset protection will not eliminate the risk of attachment or loss of your asset sentirely, despite the claims of the various asset protection websites and marketers. The only way to guarantee that your assets can not be taken, is to not own any assets, an approach which obviously cuts against the goal of protecting your assets. In some cases is it possible to increase the level of protection by giving up some control over the assets. The strategic balance to be stuck then, is between control and protection.
The most important aspect of asset protection is timing. By the time many people begin to understand the importance of asset protection, it is too late. Virtually every state prevents 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 to oneself and a spouse (such as the retitling of a transfer of a house from one spouse to both spouses) is avoidable, if accomplished after the debt in question was incurred. However, transfers and other asset protection steps undertaken prior to the incurrence of the claim or debt at issue, normally can not be set aside as fraudulent.
In a future article, I will discuss 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 Campbell Miller Zimmerman, P.C., located in Leesburg, Virginia. The information provided in this article is general in nature and is not intended nor provided as legal advice and should not be relied upon as such or utilized as a substitute for professional service and advice in specific situations.