Asset Protection Planning 303 – Strategies and Pitfalls
January 8, 2014
By: Barry E. Haimo, Esq.
This post is the third in a series introducing you to asset protection planning. By now you should know what a creditor is. If you don’t, please read this post first. We then recommend you read the two preceding posts first before continuing.
- Asset Protection Planning 101 – Build Your Financial Fortress
- Asset Protection Planning 202 – Structure the Right Plan
The reality is that we live in a litigious world. Either you have been sued or a friend or family member of yours has been sued. The bottom line is you probably realize how disruptive and potentially devastating it can be. The question becomes, “what can I do to protect my family and my business?” Fortunately, there are many options for you to pursue. Some options are basic strategies and are relatively inexpensive. Other strategies, which utilize trusts and business entities to take advantage of asset protection and creditor exemption laws, may be more complex. Consequently, they are more expensive to execute as a result. Lastly, there are extremely complex options, which relate to self-settled asset protection trusts. These trusts are relatively new and are becoming increasingly popular. Similarly, offshore trusts and business entities are becoming more prevalent. When it comes to asset protection planning, you need to ensure you are working with a team of professionals who believe in transparency and playing by the rules. Otherwise, you can encounter significant penalties and potentially contempt of court (jail). What follows are some basic strategies and their accompanying pitfalls.
Basic Asset Protection Strategies:
In the case of asset protection planning, it ranges from simple planning, taking advantage of vehicles that are expressly exempt from creditors. In Florida, the foundation for asset protection is found in the Florida Constitution for what is called “Homestead.” With few exceptions, a creditor cannot take away your homestead protected primary residence. Additionally, you can employ vehicles listed in Chapter 222, Florida Statutes, which include, annuities, qualified retirement plans, life insurance and head of house hold income. There are a significant amount of variations of these vehicles that can be structured for tax and investment purposes. As a result, you absolutely must ensure you are working with an extremely competent financial planner.
Complex Asset Protection Planning Strategies:
Complex asset protection planning generally will include taking advantage of some combination of nested revocable and irrevocable trusts and various business entities. Each entity insulates and isolates property from each other. It requires a lot of paperwork and discipline. It can also be relatively expensive. Engaging in complex asset protection planning implies you’ve already taken advantage of the simpler, less expensive buckets. Together, these vehicles enable you to accomplish your tax and investment objectives.
Advanced Asset Protection Planning Strategies:
Advanced asset protection strategies generally refer to self-settled asset protection trusts. These are relatively new creatures, which is why only a few states allow them. Remember, revocable trusts do not provide asset protection benefits, but irrevocable trusts do. Self-settled asset protection trusts (SSAPTS) are created by statute to arm people to enjoy the benefits of both revocable and irrevocable trusts; mainly, you can retain the asset protection benefits of an irrevocable trust and not give up dominion and control of the assets placed in the SSAPT. Because of the youth in this area of the law, the law is not as well settled as it is in other areas. There are many cases where a debtor was placed in contempt of court (jail) because he or she was unwilling or unable to pay a creditor in response to a court order to do so.
Lastly, maximizing the asset protection benefits can be enjoyed by forming an entity in another country with favorable asset protection laws. The advantage is that it forces creditors to pursue a judgment and collection in another country with often very different and less favorable bodies of law. It will probably also require the creditor to hire multiple attorneys. The disadvantage is that it can be very expensive. Additionally, the United States is tightening up on tax reporting, making it very costly and even criminal to fail to disclose assets that are abroad.
Below is a good article from Forbes discussing some of these issues.
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Barry E. Haimo, Esq.
Strategic Planning With Purpose
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