Asset Protection For the Uninitiated
by Shane Flait, ©2008

One specialty in financial planning is asset protection. This relatively new area has grown considerably over the last two decades. What’s prompted this growth is the increased occurrence in the U.S. of grossly unfair court judgments coming out of kangaroo trials in the family (i.e. divorce) court system. This is big business in the U.S.

Now I agree that the ability to get justice for private transgressions and contract failures is essential to freedom. But some plaintiffs and their lawyers seek and receive unfair judgments against defendants. The family court system is one way. But additionally, people with wealth are often targeted as defendants with ‘deep pockets’. They’re continually threatened with frivolous lawsuits to see how much they’ll settle for.

Threatened litigation, unfair, or enormous judgments can destroy a person’s life and legacy. It can relegate a person to a life of poverty - a form of ‘civil’ punishment for never doing anything wrong.

Two goals for setting up protection of your assets from lawsuits are:

·         To make it appear that you have no assets to minimize being targeted in a gratuitous lawsuit, and

·         To prevent, limit, or hinder a plaintiff’s ability to seize your assets in satisfaction of a presumably unfair court order.

Legal considerations on enforcement of a judgment

Judgments are enforced against you in the country you reside. Other countries are not required to enforce a U.S. judgment. The issue must be re-filed in the new country and that country must conclude that it wants to uphold the judgment or not.

To force you to pay a judgment, the court must find you have the ability to pay it, and then it can enforce the judgment by seizing the assets. If it believes – though clear evidence of sorts - that you have the assets, but can’t find them, it can seize you under contempt of not delivering the assets.

The U.S. makes a distinction between creditors. Your bankruptcy creditors have limited claims against you. They cannot get access to assets you have in certain qualified plans – such as a 401(k) or and IRA. Creditors seeking child support or alimony judgments have unlimited claim to all your assets if need be. These judgments cannot be forgiven by the court.

Often the these goals imply one or more legal entities (trust, corporations, limited liability companies, family partnership, etc.) to shield your assets from your ownership or control, and thereby prevent or limit a winning plaintiff from seizing them.

Considering the asset protection goals and the legal consideration above, asset protection entities and strategies fall into two categories according to their location.

·         Domestic strategies with any legal entities formed within one of the states with favorable defendant or debtor protection laws. Usually, these jurisdictions permit the creation of barriers to a judgment against the defendant or debtor.

·         Off-shore strategies with legal entities and jurisdiction that place assets in a foreign country - outside the reach of creditors and the U.S. court system.

 Domestic asset protection, where the  U.S. entity that controls or owns your assets provides you – the defendant or debtor - with a solid layer of protection from having those assets seized. Under a court challenge you’d have firm statutory and case law supporting the legal entity’s claim to retain the assets. Offshore asset protection seeks a similar scheme of protection.

Fraudulent entity:
If the court finds that the entities you created are simply a shield for you – or a sham of some sort - and that you have control to take the assets as you wish. Then the court can simply seize those assets or order you to deliver those assets to the plaintiff.

Fraudulent transfer of your assets:
If the entities you created are valid, then the court can decide is if you fraudulently transferred your assets to this entity. If you did, then this asset protection strategy will fail and your assets will be seized.

 A fraudulent transfer of assets is often considered to have occurred if you transferred them within 2 to 4 years – depending on the state – of the time a claim for those assets is filed.  So you need to transfer those assets long before any claim against you is contemplated.

Enforcement of Judgment:
Here is where the ‘domestic’ location differs from the ‘off-shore’ location strategies. The U.S. can easily enforce its judgment for assets within you U.S. since it has jurisdiction.

But the ability to seize those ‘protected assets’ when they’re outside the U.S. is significantly reduced or nullified. If you’re ordered to produce the assets –or its equivalent value – under a court order and you refuse, then you can be seized under a contempt of court order and jailed until you produce them. Of course that’s if you are within the U.S. jurisdiction.

The earlier you begin an asset protection strategy, the better off you are. If no one knows you have assets- all the better.

Shane Flait is a writer and educator. Get more info at www.EasyRetirementKnowHow.com