Back To: INSURANCE & RISK MANAGEMENT
Asset Protection Definition
Asset protection refers to a concept of legal strategies that business entities and individuals use to protect their assets from civil money judgment. The asset protection technique ensures that businesses and individuals’ valuable assets are safe from the creditors’ claim. They use this strategy to bar creditors from accessing certain assets but without breaching the debtor-creditor law.
A Little More on What is Asset Protection
Individuals who own businesses, real estates, or any other type of wealth, will want to ensure that they legally safeguard them from those who may want to put a claim on them. Creditors and former spouses are examples of people who are likely to claim. If such individuals happen to win a lawsuit against you, then you are likely to lose either your entire property or part of it, depending on the court’s ruling.
To avoid such, property owners can opt to convert their property into an offshore asset protection trust. It means that the property will be out of the local courts’ jurisdiction, and so, no one will have a right to claim it.
Note that a court judgment can easily seize assets under your name. However, those assets not under your name are safe from seizure because they do not belong to you as an individual. For instance, assets under a corporation, or a limited liability company, are not your personal assets, meaning that they don’t belong to you alone. So, a court cannot seize such assets, even if you happen to lose a lawsuit in court.
However, to have such complete protection in place, you will need to meet some legal, best practices, and filing requirements. In a state like California, for example, has weak protection laws. So, if you reside there, additional steps will be necessary in order to have complete protection. Understanding the state’s requirement is, therefore, crucial as far as asset protection is concerned.
What asset protection basically does is to help asset owners insulate assets legally. It ensures that while insulating assets, businesses, and individuals do not engage in illegal practices such as concealing assets, fraudulent transfer, contempt, bankruptcy fraud, or tax evasion.
What is the Appropriate Time to Initiate Asset Protection?
There are options in place that you can follow to protect your assets from an ongoing lawsuit. However, according to experts, it is safe for you as a property owner to initiate asset protection before a claim or liability occurs. The reason is that it will be too late to do meaningful protection the moment a creditor or a spouse initiates a claim over the property you wish to safeguard.
Note that asset protection is a form of financial insurance. So, it will be in the best interest of a property owner to implement it in advance before the need arises. It will help to prevent a fraudulent ruling, given that it is a civil and not a criminal case. Planning asset protection ahead can be beneficial to a debtor. It prevents those targeting him or her from filing a lawsuit. Also, it ensures that a debtor gets a favorable ruling in court.
Establishing an asset protection plan ahead will put you in a powerful position. You will not be an easy target for your creditor or spouse. It can prevent a lawsuit by making it impossible for someone to put a claim on your assets. In case of any litigation, it will provide reasonable negotiation leverage.
So if as a debtor, you feel that there is a possibility of someone filing a lawsuit against you, it is time to act fast, to ensure a favorable outcome. With proper planning, you can be in a better position to protect the wealth you have worked so hard for from the creditor’s claims.
Methods Used in Asset Protection
When it comes to asset protection, the law protects only a few assets from creditors. The assets may include things such as retirement plans, home equity, and limited partnerships. These are assets that one does not hold legal title, making them untouchable. There are various methods individuals or business entities can use to protect these assets from possible claims. They include the following:
- Asset protection trust- This is a good way of protecting assets, especially for those debtors with significant assets. Note that you can give a legal title to personal assets in a trust and still retain control over assets, but you cannot revoke the trust. Asset protection trust means that your name will no longer be on the assets as they stop belonging to you once you transfer the ownership. Such assets cannot be sieved as they are under the trustee’s authority and not you.
- Family limited partnerships (FLP)- These are business establishments that are common among those individuals in real estate planning. The assets are under the ownership of partners who must also be family members, and the assets are in the business’s name. Note that a court cannot seize assets under FLP because they belong not to an individual but a family partnership.
Benefits of Asset Protection Planning
Asset protection planning has a number of legal techniques that provide individuals and business entities with a variety of protective benefits. Some of these benefits are as follows:
- Ensures Financial Privacy
Private ownership is one major reason for protecting assets. Owning real property as well as other forms of private wealth can reduce your net worth visibility. Remember, when a lawyer reviews a case related to asset claims, he will search through public records to see if he can find assets to liquidate for judgment purposes. If he finds none, there are high chances that he will not take up the case because he has nothing tangible to prove a judgment. Generally, financial privacy is a sure way of reducing risk related to a predatory legal situation.
- Prevent Lawsuit Hurdles
Litigation, as well as lawsuits, are generally expensive, and they can drain your resources. A well-thought asset protection plan is a sure way of minimizing your losses. In a lawsuit, lawyers are always winners. Even after winning a case, you still have to pay legal expenses. Some of these legal expenses can sometimes be a bit more expensive than the lawsuit itself. What this means is that preventing a lawsuit is very crucial than winning it. So, asset protection planning is a measure that can keep you away from legal battles over assets.
- Judgment Proofing
The greatest achievement in asset protection is to ensure that it prevents the seizure of your property (assets). However, to ensure this, you will need to have powerful international legal tools. A good example is an offshore trust. Property in the offshore trust is not within the local court jurisdiction and, therefore, a court cannot seize them. Also, creditors or former spouse cannot put a claim over them.
- Preventing Theft
In this error of technology, data breaches are on the rise. If you own assets and you have your asset’s private information all over the net, you can be an easy target for thieves. They can easily access the information and use it to steal your assets, especially if the assets are not under any protection. However, if your assets are protected, it will be difficult for someone to hack the information and use it to steal the assets.
- Reduce Accountability Risk
If you have a well thought out asset protection plan in place, you can save yourself from losing the property you have worked so hard for over the years. Without a good plan of protecting your assets, you are at risk of losing your wealth to creditors or spouse claims. Asset protection will minimize such risk and also keep your business safe.
Guidelines for Setting Up Asset Protection Strategies
- Plan your asset protection before you find yourself in a lawsuit battle
- Be wise and separate your personal assets from business assets
- Avoid sole proprietor as it puts you at risk of losing your assets. Remember it is easy to seize property that is under your name
- To ensure asset protection, it is advisable to use a registered corporate
- Ensure that your annual asset protection requirements are intact so that your assets are always safe from creditor’s claims
- Ensure that your business assets are safe in a business entity
- Ensure that your commercial insurance policy is comprehensive. Such an insurance policy will ensure that you keep the property, and it does not end up in a court-ordered settlement.
- Keep off scams to do with discount asset protection and corporation
Reference for “Asset Protection”
Academic research on “Asset Protection”
Risk analysis for critical asset protection, McGill, W. L., Ayyub, B. M., & Kaminskiy, M. (2007). Risk analysis for critical asset protection. Risk Analysis: an international journal, 27(5), 1265-1281. This article proposes a quantitative risk assessment and management framework that supports strategic asset‐level resource allocation decision making for critical infrastructure and key resource protection. The proposed framework consists of five phases: scenario identification, consequence and criticality assessment, security vulnerability assessment, threat likelihood assessment, and benefit‐cost analysis. Key innovations in this methodology include its initial focus on fundamental asset characteristics to generate an exhaustive set of plausible threat scenarios based on a target susceptibility matrix (which we refer to as asset‐driven analysis) and an approach to threat likelihood assessment that captures adversary tendencies to shift their preferences in response to security investments based on the expected utilities of alternative attack profiles assessed from the adversary perspective. A notional example is provided to demonstrate an application of the proposed framework. Extensions of this model to support strategic portfolio‐level analysis and tactical risk analysis are suggested.
Asset Protection Trusts: Trust Law’s Race to the Bottom, Sterk, S. E. (1999). Asset Protection Trusts: Trust Law’s Race to the Bottom. Cornell L. Rev., 85, 1035.
After the drought: The impact of microinsurance on consumption smoothing and asset protection, Janzen, S. A., & Carter, M. R. (2013). After the drought: The impact of microinsurance on consumption smoothing and asset protection (No. w19702). National Bureau of Economic Research. To cope with shocks, poor households with inadequate access to financial markets can sell assets to smooth consumption and, or reduce consumption to protect assets. Both coping strategies can be economically costly and contribute to the transmission of poverty, yet limited evidence exists regarding the effectiveness of insurance to mitigate these costs in risk-prone developing economies. Utilizing data from an RCT in rural Kenya, this paper estimates that on average an innovative microinsurance scheme reduces both forms of costly coping. Threshold econometrics grounded in theory reveal a more complex pattern: (i) wealthier households primarily cope by selling assets, and insurance makes them 96 percentage points less likely to sell assets following a shock; (ii) poorer households cope primarily by cutting food consumption, and insurance reduces by 49 percentage points their reliance on this strategy.
Offshore Asset Protection Trusts: Having Your Cake and Eating It Too, Marty-Nelson, E. (1994). Offshore Asset Protection Trusts: Having Your Cake and Eating It Too. Rutgers L. Rev., 47, 11.
Uninsured risk and asset protection: Can conditional cash transfer programs serve as safety nets, De Janvry, A., Sadoulet, E., Solomon, P., & Vakis, R. (2006). Uninsured risk and asset protection: Can conditional cash transfer programs serve as safety nets. The World Bank, Social Protection Working Paper. Conditional cash transfer (CCT) programs have proved to be effective in inducing chronic poor households to invest in the human capital of their children while helping reduce poverty. They have also protected child human capital from the shocks that affect these households. In this paper, we argue that many non-poor households exposed to uninsured shocks have to use children as risk coping instruments, creating long term irreversibilities in child human capital development. We explore how CCT programs can be designed to serve as safety nets for the vulnerable non-poor when hit by a shock This would help them not use children as risk coping instruments, thus avoiding long term irreversibilities in child human capital development and creation of a source of new poor.
Managerial secrecy and intellectual asset protection in SMEs: The role of institutional environment, Delerue, H., & Lejeune, A. (2011). Managerial secrecy and intellectual asset protection in SMEs: The role of institutional environment. Journal of International Management, 17(2), 130-142. Although secrecy is argued to play an important role in intellectual asset protection, the evidence suggests that the use of secrecy varies significantly across countries. This study contributes to the literature on intellectual property management in R&D firms by investigating aspects of the institutional environment that are most liable to promote managerial use of secrecy. Hypotheses were tested in a sample of 297 R&D biotechnology SMEs operating in 19 countries. Results suggest that the attributes of the institutional environment explain managerial use of secrecy.