Fifteen years ago “asset protection” was a brand new area of law only a few experts were familiar with. Today it is well understood that asset protection means setting up specific legal tools which protect your assets from a creditor, while allowing you and your family to use and benefit from those assets as you wish.
Asset protection is no longer new and has become one of the most important areas of financial and legal planning in use today. This is particularly true for higher than normal risk professionals like dentists. Not only do dentists have medical malpractice risk, but even more important is the risk they incur as business owners and employers. A dentist has about three times the risk of being sued by an employee as they do by a patient. And employee lawsuits don’t have the same insurance coverage as malpractice claims do. It’s easy to see why asset protection is now considered an essential part of estate planning.
On the other side, as asset protection planning has gotten much more popular and widely used, the world of asset protection has also gotten more complicated. There are lawyers, insurance agents, 1-800 type document prep companies and even scammers who all advertise and promote the term asset protection. Some of these plans are reasonable, but many others are downright bad, and a few can actually get you in real legal trouble.
As one of the nation’s leading asset protection attorneys, I spend much of my time explaining the difference between the many plans and strategies out there and helping my clients understand the key concepts of how asset protection actually works. We look at which strategies and tools are most applicable to them and how and where to use them.
The purpose of this series of articles is to help you understand those same Key Concepts of Asset Protectionwhich my clients learn. Armed with this education you can prepare yourself to understand the advice you may be getting and make better decisions about your own asset protection planning.
There are 15 Key Concepts that make up modern asset protection. If you understand these key concepts, making a good choice about how to implement your own asset protection plan will be much simpler and easier for you to do.
Let’s start with Key Concept #1: Separate Ownership from Beneficial use and Control.
Nelson Rockefeller once said:
“The secret to success is to own nothing, but control everything.”
This is the foundation of Key Concept #1. It’s easy to see that if you don’t own anything, then it can’t be taken away from you. One way to accomplish this is to give all your assets to someone friendly, such as a parent or a child, and then simply ask them to let you use those assets whenever you want.
This would indeed separate ownership from beneficial use; however, it does leave open some other issues, such as what happens if your children get sued, or divorced or just decide that they no longer want to give you use of those assets?
From a legal perspective, this is the equivalent of the do-it-yourself asset protection strategy once popular with doctors in which the doctor transfers all of the family assets to the spouse. The idea being that the spouse is the ‘low risk’ party.
This is a really bad idea for a couple of reasons. The first is that a court is very likely to disregard the transfer as a real transfer of assets and simply reclassify the spouse as a constructive trustee of the family assets. What this means is that a court could simply reverse the attempted transfer and hand the assets over to a creditor anyway.
The second major risk is that the ‘low risk’ spouse may have their own liability. This was exactly what happened with one doctor who called me. He had transferred all of his assets to his spouse. She promptly had a car accident in which the liability exceeded their insurance coverage by $2 Million. Since she had all the assets, it was easy for the creditor to collect against her and the do-it-yourself plan failed!
Also consider the mess the family would be in if the parties end up in a divorce with the doctor arguing that the transfer was never meant to be real, while the spouse has all the ownership, control and possession of the assets which were transferred with the doctors blessing. More than one doctor has come to regret that type of plan.
There is a much better way to separate ownership from use and control which protects the assets while not exposing the family and the parties to the unintended consequences of the do-it-yourself style plan. The better way is the subject of next month’s article and Key Concept #2: Use a Trust.
If you would like additional help, email Douglass at email@example.com.