March 5, 2021

Why You Need Asset Protection Right Now Before its Too Late

There is a runaway freight train of litigation in the United States of America—there are more than 40,000 lawsuits filed every day in this country, mostly against people with means.

There is a runaway freight train of litigation in the United States of America—there are more than 40,000 lawsuits filed every day in this country, mostly against people with means. I practice asset protection law because I believe that economic prosperity is vitally important to the United States of America. I believe the strength of this country’s economic prosperity comes from people who produce, and producers need incentives to keep producing. If all of your wealth and everything you've spent your life working for can betaken away from you in the blink of an eye through litigation, then you have less incentive to produce, resulting in a threat to our country’s prosperity as a whole.

My goal is to help you protect your hard-earned wealth and production capacity by educating you on asset protection planning. I believe that is the best and most important thing that I can do to contribute to the prosperity of the United States of America.

With that groundwork laid, let's talk about what asset protection planning is. The strict definition of asset protection planning is legal planning that is designed to place your assets beyond the reach of future creditors.

For example, I got a call from a woman who'd been at fault in a very bad car accident. The damages were incredibly severe, far exceeding her insurance coverage, and she was facing a lawsuit that was basically going to wipe her out. She hadn’t been sued yet, but she was sure it was coming. She called me wanting to protect her assets against this lawsuit. Well, guess what the person who was injured in that car accident is not a future creditor; even though a lawsuit hasn’t yet been filed, they are considered a present creditor because there's an existing claim, and it’s very difficult to protect assets in the present. I'm not saying it's impossible, and there are certainly strategic moves that can make it more difficult for a present creditor to access your assets. However, the most ironclad asset protection planning can't be achieved against existing creditors or claims.

The most effective asset protection planning is proactive in nature. You're putting it in place today to protect yourself against claims that might appear on the horizon next week, next year, or even five or ten years down the road. If your planning is in place, you can achieve a superb degree of protection for your assets and the prosperity that you've worked so hard to achieve.

The legal planning component is a confluence of three areas of law: property law, estate planning, and business. Business law encompasses corporations, limited partnerships, and limited liability companies.

I believe the best definition of property is a bundle of rights. For instance, if you own a piece of real estate, you have a bundle of rights associated with that real estate: you have the right to hold legal title, to possess the property, to occupy it, to exclude other people from it, to convey that property, to sell it if you want to, to lease the property, and so on. A tenant or a renter doesn’t own the property, but they have some rights that have been achieved through contract or leasing.

This concept of property as rights applies to both tangible and intangible property. This is critically important for asset protection purposes, because the goal is to leave you with the rights that you really want. Asset protection planning separates some of those rights and puts them into asset protection entities to make yourself a less appealing target for a lawsuit.

The second area of law that's implicated in asset protection planning is estate planning, which deals with passing on your legacy. Today, the most common use for estate planning is simply to avoid probate court; the best description I've heard of probate involves a lawsuit that you file against yourself and pay for with your own money, that benefits other people. Probate is a waste of time and money, and with a little bit of careful estate planning, you can make sure that your estate never has to go through probate court. You can take control today and dictate how you want your legacy passed on, so a judge or other third party can never intervene and reinterpret your wishes. Estate planning needs to be proactive, and it's important because it saves time and money for your heirs down the road. The main tools that are used in estate planning are trusts, wills, and proxies; this can include powers of attorney, health care proxies, living wills, HIPPA disclosures, etc., but for asset protection planning purposes, trusts are the most important tool.

 

Trusts are universally recognized in all 50 states. A trust has three components: a settler (creator), a trustee (the person who manages trust assets), and beneficiaries. A trust is a very simple tool for separating out the bundle of rights that we described earlier under the heading of property law. For asset protection planning purposes, trusts can have spendthrift provisions that protect assets in the trust from the claims of a beneficiaries’ creditor.

Business law, as I mentioned before, governs the use of legally-recognized, for-profit business entities. In the context of asset protection planning, I want to separate out three different types of business entities. One is the corporation, which separate ownership from control; the real intention behind corporate law is to limit liability. The corporation is a unique legal entity, and to the extent that it does something wrong, the corporation is liable, but the shareholders who own the corporation are insulated. This limitation of liability encourages smart risk taking, which raises capital that can create economic benefits.

The real asset protection feature of a corporation is that it separates ownership from management. There is centralized management in the form of a board of directors, and ownership is in the form of shareholders. If you own a share of General Electric stock, for example, you don't have any sayin the day-to-day operations of the company, but you do have a limitation of liability. If General Electric does something wrong, and they get sued, they're held accountable for that lawsuit, but no one is ever going to come after your personal assets even though you own part of the company.

These concepts—limited liability and separation of ownership from control—also apply to limited partnerships. In limited partnerships, there are general partners and limited partners. General partners are in charge of the management of the entity and personally liable for the operation of the entity. Limited partners have no management function and limited liability. They are not personally responsible for the debts and obligations of a limited partnership.

Finally, the third type of entity to focus on in the context of business law is a limited liability company. An LLC is sort of a hybrid between a limited partnership and a corporation. The owners of an LLC are called members. The managers can be members, so an LLC can be a complete democracy. The members can also be the managers, or there can be one member who is designated as the manager, or they can be completely managed by a third party. LLCs have a lot more flexibility, and numerous options for separating the functions of management from ownership, which is key in the world of asset protection.

If you ever face a lawsuit, an attorney wants to take ownership of your assets. So the fundamental principle behind all asset protection planning is separate yourself from ownership of your assets. Think of the bundle of rights, including the right to hold legal title. To protect your assets, we would leave you with a lot of other rights, such as the ability to control, use, and enjoy the assets, but we separate you from ownership by putting the right of legal title into an asset protected entity. This would achieve a high degree of asset protection, because a plaintiff's attorney is only interested in taking legal title from you, they don’t care about taking the use and enjoyment of your assets. We make their job really difficult, because you don't own legal title anymore, we've separated out the bundle of rights.

That's the fundamental premise of asset protection planning. We're separating beneficial use and control from legal ownership. Let me use areal-world example to illustrate the point. Say you have $100,000 in a brokerage account, and you use it to buy and sell stocks on the on the market. Well, if you hold that account in your personal name, it's an asset that you own and that can therefore be taken away from you. Now, let's transfer that$100,000, into a limited liability company. That limited liability company can open the same brokerage account, and as manager of the limited liability company, you can still trade in the open market, buy and sell stocks or bonds or whatever you wish. You're still investing that money, and you're still incomplete control, but you don't own legal title to the $100,000 anymore. Instead, the limited liability company owns legal title to the $100,000, and you own a membership interest in a limited liability company.

Many states have a what's called a charging order statute in place. A charging order is simply a legal remedy that basically says, if someone sues you as an individual, and one of your assets is a membership interest in a limited liability company, then the creditor cannot take your LLC interest away from you. Instead, what they get is a charging order, basically a garnishment. They can’t in any way get their hands on the $100,000 that's inside of the LLC. However, they can intercept distributions from the LLC, so they can sort of garnish any money that you take out of the LLC. This is a very effective asset protection tool, because you've essentially protected the corpus of your limited liability company, the $100,000 that's in there. Sure, there are some limitations now, because the charging order can essentially intercept distributions that you make from that entity. But the LLC discourages lawsuits, because it's much more difficult for a creditor to get those funds than if you held those funds in your personal name. Eventually, we want to be able to protect you even from the charging order remedy. This is just an early, basic example.

To conclude let's address who needs asset protection planning. If you are a producer, anyone who is adding to the economic growth in the United States of America, you probably need asset protection planning. If you’re a high risk professional, you probably pay a lot in malpractice premiums; you are really in need of asset protection planning. I define a high risk professional as any licensed professional who cannot separate personal liability through the use of a business entity.

For example, if your physician liability for malpractice is personal to you, if you're operating a medical practice inside of an LLC or an S corp, and you commit malpractice, the S corp does not provide a limitation of liability, you are personally responsible for malpractice. This is true of physicians and surgeons, dentists, chiropractors, CPAs, attorneys—a lot of professionals are at risk. There is somewhat of a misconception that you can limit your liability using a business entity, but that’s not always the case. For a person operating a regular business, like a carwash, within an S corp, and somebody gets injured, only the assets inside of the business entity will be available to satisfy a judgment, not the owners’ personal assets. However, that does not apply in the case of professionals, and that's why I call them high-risk professionals: your personal assets are always on the line.

The second class of people that need asset protection are high net worth individuals. This is simply because if you're a high net worth individual, you have a target on your back. Plaintiffs’ attorneys are out there fishing for cases, looking for reasons to file a lawsuit against you, because it's a lucrative business model. Nobody wants to be sued, it's the most terrifying experience in the world. If you get sued, you're probably going to settle it or try to get out of it, and it's going to be an easy payday for the plaintiff's attorney.

Finally, the riskier the business enterprises you're involved in, the more you need asset protection.