How To Protect Yourself From Financial Predators And Lawsuits

Originally published on Forbes.com

I strongly believe this fact: if you’re a business owner and do not have an asset protection plan, then you either do not value everything that you’ve built very highly or you are uninformed of the importance of asset protection.

I don’t mean to be like the hard-selling promoters of asset protection plans who try to put fear in your heart that “You’ll lose everything if you don’t give me thousands of dollars to bullet-proof your estate.” But developing an estate plan which combines asset protection planning is vitally important for entrepreneurs, and it doesn’t have to be that difficult or expensive.

My attorney Andrew is an estate planning attorney who has a focus on asset protection planning. He’s worked on my estate plan and that of many of my clients. And unlike the Chicken-Little estate attorneys, he takes a different approach. Here’s what Andrew has to say about asset protection:

“We do live in a litigious society and there’s over 20 million new lawsuits filed in the United States every year, so I’m not trying to downplay asset protection planning. But selling this concept of protection of your assets by fear-mongering I think is deplorable. I think of asset protection planning in a much different way.

“You work really hard all year long and the average person, if they’re working full-time as an entrepreneur or employer, is going to work 1,600 to 2,000 hours every year. Yet so few people ever take the time to just sit down—even for one hour—on a yearly basis to think about [protecting] all the hard work they’ve put towards the collection of these assets.”

I think Andrew makes a great point: why work thousands of hours to build your business and estate, and never take an hour or two to protect it?

Here’s What You Need to Know About Estate Planning and Asset Protection

The Chicken-Little estate attorney may promise to “bulletproof” your estate, or make it “ironclad.” The truth is, no estate plan is ever fool-proof. Regardless of how well your estate is arranged, a determined lawyer may be able to make a claim on your assets. And if the judge sides with them, you’re out of luck.

Fortunately, 95% of lawsuits are settled out of court. So the job of an asset protection plan is simply to put you in the best bargaining position to settle the lawsuit in a fair and equitable manner..

Says Andrew, “The goal here is to create those legitimate legal barriers that a company coming after you understands they’d have to go through to try and get after your assets—meaning time and expense in doing so—and thus deterring them from wanting to continue on with this lawsuit.”

The more legitimate legal arguments that you can put in front of a lawyer, the more likely you can make lawsuits go away or settle out of court. Legitimate is a key word here. Asset protection planning is not hiding your assets; it is not avoiding legitimate claims by current or known creditors.

With a properly drafted asset protection plan, you should be able to be completely open and honest about your plan, show it to the opposing side and still be able to say, “I don’t have assets available to you.”

The Asset Protection Spectrum

“Asset protection planning is an enormous topic. There are hundreds of different techniques that can be utilized in order to create a barrier between your creditors and your assets,” says Andrew. “And no one tool is the magic wand for all clients. These plans must be specifically tailored to the individual circumstances of each client.”

That’s why using a self-service legal website can be such a risky move. There are so many techniques and so much to consider, that the benefit of an estate planning attorney is invaluable.

These hundreds of different techniques create a spectrum ranging from reasonable barriers for your assets, to incredibly painstaking and tedious barriers that will discourage anyone coming after your estate.

“There are very simple things that people can do through titling of assets that will give you a little bit of protection, but not cause a huge amount of disruption to your life or assets,” says Andrew, “all the way to very complex, complicated types of things or transactions like moving your assets out of the country to a foreign locale and thus beyond the jurisdictional authorities of the United States.”

So asset protection planning is about finding where you feel comfortable on this spectrum. It’s determining how many legitimate legal arguments you want to put between creditors and your assets, balanced against how much intrusion into your life you’re willing to deal with.

Here are three example of barriers from Andrew to demonstrate the point, starting with the most intrusive.

Offshore Trusts and Bank Accounts

We’ve all heard about “the rich” stashing money in their bank accounts in the Cayman Islands and other foreign locales. It even became an issue for Mitt Romney during the 2012 presidential campaign.

Most people think of this as a method of tax savings, but the major benefit is in the asset protection. If someone wins a legal judgment against you in the United States, they would then have to go to another, sovereign Nation and attempt to collect on that judgment.  This is costly, the burdens of proof can be much higher in these other foreign locales, and there is certainly no guarantee of success on the part of the creditor.

So setting up an offshore bank account or trust is a strong move, but it’s also very inconvenient. It’s expensive, your money is stuck in another country, and if you try to bring the money back there are large tax consequences.

That’s why another method that’s a little closer to home has become more popular in recent years.

Domestic Asset Protection Trusts

In the late 1990’s, Alaska and South Dakota became the first states to enact laws allowing Domestic Asset Protection Trusts (DAPT). A number of other states have followed suit, including Nevada, Utah and South Carolina to name a few.

These trusts allow you to give up legal ownership of your assets, while remaining the beneficiary of the trust. This means assets inside the DAPT will be off-limits to future creditors because you’re no longer the owner, but you can still access and use the assets because you are the beneficiary.

(If you currently have creditors knocking at your door, A DAPT will not protect you from them. Your assets are only protected from future creditors, determined by state law.)

A DAPT is a powerful and legitimate legal barrier that lawyers will have a difficult time breaching. Yet it isn’t nearly as intrusive as an offshore bank account or trust—so it’s an option for people who want a solid asset protection plan, but don’t want to go offshore.

Pay Attention to Whose Name is on the Title

Here’s a simple technique with minimal intrusion.

If you live in a Separate Property or Common Property state, as opposed to a Community Property state (AZ, CA, ID, LA, NV, NM, TX, WA, WI), then you or your spouse can be the sole owner of your house, car or any other asset.

So if your business makes you a more likely target for a lawsuit than your spouse—especially if you’re a professional providing a service—then you may want to take your name off the title of assets that you want to protect.

“If I make a mistake in my job, I could get sued. I have much more liability risk on a daily basis than my wife does,” says Andrew, “So we’ve allocated our assets in different ways. The home that I live in is owned by my wife in her trust. That gives me a legal argument so that I can say ‘Go check the title on my home. It’s owned by my wife’s trust. She wasn’t practicing law, she couldn’t have committed malpractice.'”

This is not a “bullet-proof” technique.  It can be defeated and has been defeated.  Remember though, there is no bullet proof technique and what you are attempting to do is create that legitimate legal barrier to your asset and adding a significant bargaining chip in your favor as you negotiate a settlement of the case.

Your Estate Plan Will Be Unique

Deciding where you belong on the spectrum of estate planning, and how difficult you need to make it for creditors to come after your assets, will decide what plan is right for you.

And as my attorney says, “There is not one type of plan that works for everybody—other than to say that the best time to start planning [to protect your assets] is when you absolutely have no reason to do it—meaning you don’t already have a creditor waiting in the wings.”

In that way, estate plans are just like insurance: you can’t get it after you need it. The law doesn’t allow you to protect your assets after someone has a claim against them. So the time to start planning and finding your place on the spectrum, with an attorney, is now.