Three Basic Asset Protection Techniques

In this depressed economy, every dollar you earn and every asset you own is at risk. Vultures in the form of creditors and litigators are salivating at the thought of a successful individual who has his assets unprotected. If you are making money, you currently have a bull’s eye on your back. The only way to protect what you’ve earned from those that are trying to take it from you is to set up a comprehensive asset protection plan. Thirty percent of potential lawsuits are avoided by the mere presence of an asset protection plan. There are three techniques for protecting your assets. Any one person might utilize one or all of these techniques.

1. The first technique is to remove your name from the ownership of your assets, but not from the control of your assets. You want to be rich but look poor.

One entity that you can transfer your assets into to accomplish this goal is a limited liability company, or LLC. A creditor cannot attach a debt to the membership interest of an LLC. Therefore, the shares you own of any LLC are protected from any creditor liens. The creditor or judgment holder is limited to owning a charging order against any distributions made from the LLC. They will not be able to touch any of the assets in the LLC, nor can they take any money you pay yourself as salary (without an order allowing a garnishment of wages) or any assets purchased or sold in the name of the LLC. As long as you avoid distributions from the LLC, the creditor will have no ability to collect at all.

Another entity that provides protection for your assets is the irrevocable trust. You can transfer your assets into an irrevocable trust and prevent any debt you owe from being levied against those assets since, technically, you don’t own them. You can name a spouse, child or friend as the trustee and retain actual control without having any legal ownership or control. An additional benefit of the irrevocable trust is that it does not need to be included on an asset sheet, since it is no longer one of your assets. Any shares your own of an LLC, however, must be included on an asset sheet, even though those shares are protected.

2. The second technique is to convert your assets into vehicles that are already creditor-exempt. Homestead property, annuities, IRA’s, pension plans and life insurance policies are the most common creditor-exempt entities.

For new or existing Florida residents, by far the most convenient vehicle to protect your assets is via the Florida Homestead statute. Any interest acquired in, or value added to, a person’s homestead is protected by Florida’s homestead exemption. The only creditors that are able to attach a lien to your homestead property are those creditors that hold liens arising out of your property. The three most common liens of this type are mortgage liens, Federal tax liens and mechanic’s liens (money owed to someone you hired to do work on your property). Association liens are also of this type.

The cash surrender value of an insurance policy insuring the life of a Florida resident is also not subject to creditor claims. Also note that the death benefit from life insurance is protected from claims so long as the death benefit passes to a beneficiary and not the decedent’s estate.

The proceeds of an annuity contract issued to a resident of Florida are not subject to the claims of creditors. The operation of this exemption is best illustrated by Goldenberg v. Sawczak, 791 So.2d 1978 (Fla. 2001). Dr. Goldenberg placed several million dollars into an annuity, commenced practicing medicine without insurance, then committed a serious act of malpractice a few years later.

The Eleventh Circuit certified the question of whether the surrender value of the annuity is exempt, rather than just the “proceeds” as is written in the text of the statute, Section 222.14, Florida Statutes. The Florida Supreme Court, in a unanimous decision, held that the surrender value of an annuity contract is exempt if subject to a contractual surrender penalty, thereby shielding from the malpractice victim Dr. Goldenberg’s largest asset.

3. The third technique is to make all of your current assets less attractive to those who might be looking to take them from you.

We do this through a process called equity stripping. Placing liens on assets that are currently unencumbered or have some equity makes the asset appear more like a liability. You don’t actually have to go to a bank and take out a loan. Equity stripping doesn’t have to cost you any additional money. You can have one of your out-of-state LLC’s write a Note for more than your property is worth. When a creditor or litigator looks at your assets, they will see a piece of property that is encumbered by a loan worth more than the asset itself. The property will be “under water” and undesirable to any potential asset vultures.

Asset protection is a necessity in this day and age of “money for nothing” mentality. Fifty million law suits are filed each year. Each of us will be sued 5 times during our lives. Will you brush your lawsuit off without worry or will one of those law suits permanently cripple you and your family financially? The time to plan is now.

Warning: You should always consult a professional when establishing and enacting an asset protection plan. Asset protection attorneys are trained specialists who can see to it that a plan is put in place that protects without the risk of being deemed to be fraudulent.