Wealth Preservation & Asset Protection

Wealth Preservation & Asset Protection

After working hard to create wealth, to provide comfort and security to yourself and your loved ones, the last thing anyone would want to happen is to potentially put that wealth at risk. People are often at a loss as to what steps they can take to preserve and protect the wealth and assets that they have built up over their lifetime. The McCarthy Weidler team is here to help you mitigate your risks, and create an action plan for your future. We can help you through wealth preservation and asset protection planning.

What is Asset Protection Planning?

In general, asset protection planning organizes a person’s assets and affairs in a manner to make them less vulnerable to the claims of unanticipated creditors and is best initiated before it is needed. You cannot start an asset protection plan after a creditor appears. One popular and effective form of asset protection is asset protection trusts.

Asset Protection Trusts

What is an Asset Protection Trust?

Under a normal trust arrangement, the person establishing the trust (the ‘settlor’) transfers property to a third party (the ‘trustee’), who holds, administers, and distributes the property to designated individuals (the ‘beneficiaries’) in accordance with the directions set forth in the trust document. Traditionally, a creditor of the trust settlor could reach trust property if the settlor was also a beneficiary of his or her trust, even if the trust was irrevocable.

Under the asset protection trust arrangement, certain domestic jurisdictions, such as Alaska, Delaware, and Nevada, and offshore jurisdictions, such as Nevis, Cook Islands, and New Zealand, allow the settlor to be a discretionary beneficiary of the trust, hold other, limited powers, and protect assets from unanticipated creditors.

An asset protection trust document instructs the trustee to distribute or withhold income and principal to the beneficiaries (including the settlor) in the trustee’s discretion. The trustee is prohibited from distributing trust property to a beneficiary’s creditors or under any condition of duress (i.e., to satisfy a judgment against the settlor).

Domestic Trust versus Offshore Trust

Most practitioners will agree that offshore asset protection trust provides more protection than a domestic trust, especially if the settlor does not reside in the asset protection trust state. If the settlor does not reside in an asset protection state, or have another (non-asset-protection) purpose that requires a domestic jurisdiction, the settlor should choose an offshore jurisdiction for the following reasons:

1. With an offshore trust, a foreign court will not honor judgments from U.S. courts. Similarly, a foreign trustee will ignore a U.S. court order or judgment. Meanwhile, the U.S. trustee of a domestic asset protection trust could be ordered by a judge to turn over trust property or face contempt charges.

2. With an offshore trust, a creditor obtaining a judgment in the U.S. would need to re-litigate the case in its entirety in the foreign jurisdiction.

3. Offshore jurisdictions present geographic, procedural, and financial hurdles to a creditor interested in reaching trust assets. The mere fact that a trust is a foreign trust may deter creditors from pursuing claims or encourage settlement for a fraction of the claim.

4. With a domestic trust, the Full Faith and Credit Clause of the Constitution requires states to honor judgments awarded in other states. Thus, a state court may choose to honor a judgment for money against a domestic asset protection trust’s assets.

5. With a domestic trust, the federal Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 added a provision to the bankruptcy code that will deem a transfer to a self-settled trust or similar device to be a fraudulent transfer if made within 10 years of filing a petition for bankruptcy and made with fraudulent intent to hinder, delay or defraud existing or future creditors.

6. Although subject to the issues described above, a domestic asset protection trust can be drafted to increase the asset protection component by employing techniques such as not adding the settlor as beneficiary until such time when the risk of a claim has passed or incorporating flight clauses that cause the trust to move offshore if the risk of a claim arises.

A domestic asset protection trust has some advantages over an offshore asset protection trust, such as the following:

1. A domestic asset protection trust situated in a state that has low or no income tax can be structured to save on state income taxes of the settlor’s home state. An offshore asset protection trust does not offer the same flexibility in income tax planning.

2. A domestic asset protection trust has no special IRS disclosure requirements, making administration easier and less costly.

The settlor of an offshore asset protection trust must also choose whether to transfer the trust property offshore. Better asset protection is achieved by transferring property offshore because jurisdictional ties to U.S. federal and state courts are severed and the creditor must travel to the foreign jurisdiction, where likelihood of success is more remote and clearly more expensive. Exporting assets also prevents a U.S. court from exercising in rem jurisdiction over the assets, such as freezing a bank

Limited Liability Business Entities

When setting up your business, it is best to get legal advice to determine what type of business entity would best suit you. A limited liability business is great because the partners in the business would have limited personal exposure to any potential liability issues that may arise. This helps to isolate risk, and you would be able to take advantage of state law protections in regards to the debts incurred by a company. Also, if you have real estate assets (whether that be commercial or rental real estate), setting up a LLC (Limited Liability Company) may be an option. Many people who own multiple real estate assets keep those assets in their own name. This could pose a potential risk with liability. If a large judgement comes against you, the whole portfolio could be at risk. An LLC for each property would help to mitigate this risk, and protect your real estate portfolio. The rules around this vary from state to state, our team will provide you with your options and explain what type of LLC may work best for you.

Creditor Protection Planning

Our team can work with you to create a plan to protect against any potential creditor action. If you own a business, medical practice or professional services company, you may require these types of services. We can put together an action plan to protect you from future creditors. We would discuss estate and financial planning strategies that would help insulate your assets from creditors (for current and future generations). We can integrate this plan with a business succession plan and estate plan.

The best plan of action is to set up Wealth Preservation and Asset Protection methods well before they are needed. Many states have laws against people transferring assets out of their name in order to hinder or delay a creditor. For this reason, asset protection planning must take place well in advance of any potential creditor action. So if you have assets you’d like to keep protected, it is best to put strategies in place immediately. There are countless instances of a slip and fall turning into a multi-million dollar judgement. If you are not careful, you can find your bank accounts, real estate and investments at risk, leaving you with a depleted net worth, and leaving potential financial burdens for your loved ones. McCarthy Weidler has many strategies we can employ to ensure your assets are protected, so that the wealth and assets you’ve worked so hard to accumulate can continue to be enjoyed by yourself and your heirs. We understand that no two situations are completely alike, so we can tailor a plan to suit your specific situation.