The first full-length show, to be followed at the same time on the third Friday of each successive month, was from 12:00 noon to 1:00 p.m. on the general subject of asset protection.
I first explained that the most basic rule of asset protection is to avoid unnecessary liability for other persons’ liabilities, whether by needlessly guaranteeing or co-signing someone else’s promissory obligation (or doing so without appropriately considered limitations), by needlessly authorizing someone else to take risk-creating actions as an agent or bailee (as in the case of a loaned motor vehicle), or - - the worst example - - by needlessly conducting a business or other risk-taking venture with other persons (including employees) except in limited-liability form.
In this connection, I explained how easy it is in a business context to incur personal liability for others’ actions as a general partner even if none of the participants in a venture intended to enter into a partnership. Such arrangements occur all the time and are the opposite of sound asset protection planning: unnecessarily expanding the scope of the partners’ personal liability beyond the consequences of their own actions to the consequences of all the other partners’ actions, too.
The next topic was liability insurance. I emphasized that many people, perhaps most, not realizing all the ways in which they can incur personal liability and the potential extent of such liability, fail to carry adequate liability insurance. I also emphasized the relative inexpensiveness of “umbrella” liability insurance for large amounts of coverage over the base amount covered by the primary liability insurance policy.
However, even when adequate in amount, liability insurance typically comes with many exclusions and limitations of coverage. For one common example, it would not cover any intentional tort. For another, it would typically exclude motor vehicle accidents while the insured was under the influence of alcohol or drugs.
For these reasons, in this litigation-prone country, sound asset protection planning requires the use of limited liability entities for most business ventures. Even though a person can not avoid liability for his own torts by use of a limited liability entity, he or she can thereby avoid personal liability for all the contractual obligations of the entity itself or the tort liabilities of any of its other members.
Such entities must be properly organized and operated in order to ensure the desired asset protection, but if they are that protection will definitely be available because of the strong public policy in favor of limited liability entities as a means of encouraging business formations and business activity. Moreover, the procedure for organizing a business in limited liability form is quite simple - - in the case of a “limited liability partnership” such as my own, a mere registration of that status with the Secretary of State.
Assets held by limited liability entities are usually not subject to the claims of creditors of the individual owners of the entities; all that such a creditor can ordinarily obtain is a “charging order” upon the debtor’s interest in the entity, leading to (at most) the acquisition of that interest without any control or transfer rights. In this sense, the members of such entities enjoy a considerable degree of “outside in” protection from any liabilities arising outside of the entity’s business as well as “inside out” protection from liabilities arising from the business itself.
Beyond limited liability entities, the type and form of ownership of a person’s assets can also provide crucial asset protection.
One well-known example of a type of asset that is protected from judgment execution is retirement plans ( to the extent that the interests in them are owned by the plan participants or their spouses). Another is the proceeds of life insurance policies.
As for the form of ownership, tenancy by the entirety - - which in Indiana extends to all real estate owned jointly by a husband and a wife during the term of their marriage - - generally shields any assets so owned from the claims of the creditors of either of the spouses though not the joint creditors of both the spouses. Indeed, in some states such as Florida, tenancy by the entirety even extends to intangible personal property such as bank or securities accounts.
Proper asset protection planning can also involve the gifting of assets to others- - not after, but before claims arise against the owners. Such transfers must not be “fraudulent transfers” (a complex subject that I merely touched on). However, a married couple, for example, can accomplish a great deal of property and asset protection by the simple expedient of equalizing the spouses’ estates - - something that a divorce court would do, anyway, if their marriage came apart.
At the extreme of asset protection by form of ownership are foreign asset protection trusts. I discussed a number of the features of such trusts that make them almost invulnerable to the claims of judgment creditors. I also remarked in response to Chris’s question that I saw nothing morally, much less, legally wrong about establishing and funding such trusts if done in compliance with domestic fraudulent transfer restrictions and U. S. tax and all other reporting requirements.
Domestic asset protection trusts established in a handful of other states, Nevada or Alaska, for example, can also afford some uncertain but definitely lesser degree of asset protection against the claims of creditors of their “settlors,” i.e. the persons who set them up. However, the general rule in the United States is that such creditors may always reach the assets of such a “self-settled” trust to the maximum extent that the settlor possibly could. That remains the rule in Indiana and Illinois.
Finally, I discussed the unique asset-protection benefits of trusts in general in regard to the potential claims of creditors of the trust beneficiaries (except settlors). As I remarked, an outright gift, unless it is promptly and properly disclaimed, can in effect quickly become a boon to the beneficiaries of the person who receives it, whereas a gift in trust generally can not. As I say to my clients, while assets remain in trust they are safely there for the sole benefit of the intended beneficiaries, not those beneficiaries’ creditors. This is another hugely important aspect of asset protection that is not fully appreciated.
In the end, asset protection planning is an integral part of estate planning. Several of the upcoming monthly presentations but by no means all of them, will explore all these matters in greater detail.
Questions
I welcome your questions! Please feel free to send them in to me at thelakeshorelawyer@lakeshoreptv.com, and I’ll try to answer them all.
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