2014-07-23 / Business News

Take measures to protect your assets into the future

MONEY & INVESTING
jeannetteSHOWALTER, CFA

If you have assets, then you need protection.

Protection from creditors, civil suits, the IRS, even possible future claims of a spouse.

Obviously, not all assets can be or are meant to be protected from creditors. Creditors typically make a secured loan on the basis that one or more assets would be collateral for the loan.

Asset protection does not imply hiding an asset; even the most secreted assets have ways of being unearthed by creditors as we do live in asset traceable/discoverable society.

Asset protection does involve an estate planning process that uses a variety of different types of vehicles to accomplish protection. Estate planning involves far more than just asset protection, yet often estate planning strategies can accomplish both estate and asset protection goals at the same time.

The object of the protection is to make sure that an estate is protected from creditors while you are alive and possibly after you pass and your estate is inherited. The owner needs to be able to get income from the asset, take withdrawals from the asset, or, as in the case of an IRA, to eventually get both income and principal.

While federal law applies to protection of some assets (e.g., retirement plans), st state law also plays a role in determining the po best vehicles and strategies for asset protection. Not all states treat homesteads or life insurance the same way. ti Asset protection extends beyond asset types and extends into strategies that make it more difficult for the creditor to get paid. For example, while offshore tax evasion is a “no-no,” it might be, for the mega-wealthy, holding assets offshore will make attachment of such asset by a creditor more difficult than a U.S.-held asset. (For clarification, fully declared offshore holdings are not against the law and can be beneficial for asset protection, but the income from such assets must be declared in full. The problems associated with offshore holdings has largely been from tax evasion and secret foreign accounts.) Creditors face even more challenges if there are layers of complexity surrounding the assets. (Honestly, what creditor wants to go after a Cayman company that holds an asset in Timbuktu?)

The more assets, the more elaborate an estate plan. But even the average Joe fears a crazy lawsuit or a business creditor seizing personal assets to satisfy corporate liabilities.

So whether you have a lot or a little, you should visit with your adviser or your lawyer. They cannot help unless you fully disclose all your assets (and potential assets) and all your existing liabilities (and potential liabilities). For instance, a leveraged business that is making money today might not be doing well in the future when creditors might eye your personal assets for satisfaction.

It is generally too late to protect assets once creditors are on your tail and a judgment has been entered or about to be entered and/or a lawsuit is about to be filed. Moving assets away from a creditor before a judgment or lawsuit is viewed as fraudulent conveyance (fraudulent transfer or fraudulent conversions). It is not just last-minute transfers or conversions that a state court (e.g., Florida) can reverse, it is conveyances made within the prior four years. However, asset protection undertaken well in advance of a creditor debacle (e.g., more than four years prior) is viewed as smart asset or estate planning and not as a plan to defraud creditors. (Under federal bankruptcy law, different fraudulent conveyance laws and time periods apply… yes, asset protection is complicated.)

So here is a list of assets that are viewed as having special protection merits. However, as federal and state laws change and are subject to differing interpretations, readers should view the list as a starting point to investigate the specifics of their state.

¦ Homesteads: Some states such as Florida have no limit on homestead protection. But movement into a homestead to avoid creditors should not be expected to hold up as a protected asset.

¦ Insurance and Annuities: Some states provide protection of the cash value of such policies; some states provide protection but for policies that were bought in their own state and some place a cap per policy on such protection.

¦ Retirement Plans: Plans that you or your spouse intimated and funded; per a recent Serene Court decision, an inherited IRA is not protected from the beficiaroes creditors. Traditional IRA and Roth Iris have a cap on their dollar abound excluded in bankruptcy. Employer-sponsored plans, (401(k), SEP IRA, Simple IRAs, etc.) have unlined creditor protection. So keep these plans separate if you want to retain the unlimited creditor protection of employer plans. You roll an employer plan into a rational IRA and you have comingled and are now subject to the Traditional IRA cap on protection.

So, consider:

¦ Buy an umbrella policy that protects you from personal injury claims above standard coverage.

¦ Have a spouse hold assets.

¦ Make the most of homestead exemptions, especially if there”s no limit.

¦ Do not use your corporate assets as your personal asset; the corporate shield can be broken if the courts can decide your corporation is your personal piggy bank.

¦ Check your states laws regarding insurance and annuities before you load them to the gills.

Laws change frequently. Your asset/ liability mix might change frequently. The nature of your businesses risks might change frequently. It is important that you not figure asset protection yourself. Getting professional counsel sooner is better as it might be that these plans need to be in effect many years in order for the wall to not come tumbling down. ¦

— Jeannette Showalter, CFA is a market specialist with Worldwide Futures Systems. Follow her on Twitter @rohnshowalter and on Linkedin.

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