Cover your Assets

Bruce Bernard, JD, CPA, ABV, CBI, (Dublin office, Ret.) and Garrett Roach, Esq., (Critchfield, Critchfield & Johnston, Ltd., Millersburg)
Jul 17, 2008

You work hard. You've accumulated some nice assets. You want to protect them from liability exposure. Right? Of course, but do you know what you need to do?

Many people think of fancy foreign trusts and partnerships when the topic of asset protection comes-up. But, you can protect your assets without going to big extremes or cost – you can take some tried and true steps.

The options you choose will depend on your asset types and your personal family, facts and circumstances. And since both tax and legal issues are involved in asset planning protection, you should discuss the ideas below with your attorney and financial advisor.

Transfer assets. You can transfer ownership to a spouse, family member or entity, but you may never be able to enjoy assets you give away.
Invest in savings plans. Retirement plans, including 401(k)s and IRAs, are protected from most creditors under state and federal law. The same is true for college savings 529 plans.
Separate business and personal assets and activities. This is a great way to limit liability exposure. In particular, keep investment assets and real estate out of reach of your company's creditors by putting them in separate entities or in the owner's name. Personal wealth should not be accumulated inside your operating company.
Maintain sufficient insurance. Consider insurance for medical, disability, personal injury, malpractice, errors and emission, officers and directors, property damage and business, to name a few. Be sure you maintain a big enough umbrella policy to guard against catastrophic claims. And make sure you have enough uninsured/underinsured motorist coverage, as medical bills oven exceed coverage limits.
Transfer assets to irrevocable trusts. These trusts can benefit your family members, and it's often advisable to have a third party trustee or co-trustee. If you retain the right to withdraw principal or income from the trust, creditors can still reach the assets. The laws vary by state and you may want to have your trust governed by the laws of another state.
Leverage up your business and real estate. This will allow you to strip out the equity and transfer it somewhere where it will be protected.
Take advantage of state exemptions. Certain exemptions can include equity in your home, life insurance policies and annuities.
Consider limited liability companies (LLCs) for real estate and investment assets. LLCs have now replaced the once more popular family limited partnerships (FLP). Creditors can generally only get a charging order against an LLC or FLP interest. Sometimes it is best to avoid having any management say and simply hold a non-managing membership interest in an LLC or limited partner interest in an FLP.
Preserve assets for generations with a dynasty trust. This is a type of trust set up for multiple generations. It is often funded with personal use assets such as vacation homes and will provide protection from the beneficiary's creditors if drafted properly.
Set aside assets for charity. Create donor advised funds, gift annuities, private foundations and charitable lead and remainder trusts for charitable giving and creditor protection.

While creditor protected U.S. and foreign trusts have received a lot of press attention, you may not need to go to this extent to protect your assets. It's okay to consider these tools, just be cautious.

Several states – Alaska, Delaware, Rhode Island and Nevada – allow creditor protected trusts. To create a trust in these states, residency is not necessary. However, you may be required to have a trustee that does reside in the state. And there is no guarantee that a court in another state, like Ohio, will not rule for creditors, necessitating appeals to get the touted liability protection.

Foreign trusts are the most problematic. The idea is to park your money in the trust of a foreign jurisdiction that does not recognize a U.S. court order. Be aware – there are some horror stories where people have had a hard time recovering their assets. It's also important to note that you cannot use a foreign trust to avoid U.S. income tax.

Both U.S. and foreign trusts do create another hurdle for creditors to jump to get to your assets. Creditors are often willing to settle a claim at deep discounts if the road to recovery is going to be difficult.

It's best to protect your assets before you are in financial trouble. Transfers after creditors come knocking may be fraudulent and can be set aside by the court. High net worth individuals have the most to lose, yet the average person still has a home, savings and retirement accounts to protect.

Being proactive is your best defense.

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