Many people are familiar with the phrase “asset protection” but are not aware of exactly what it is or how they can benefit from it-so I’ll tell you a little about it.
Creditors gravitate towards debtors that have substantial assets because if the debtor has no assets for the creditor to recover, the creditor will not waste its time and money suing the broke debtor. Likewise, a potential plaintiff who believes he has been harmed by a potential defendant will not sue the potential defendant unless that defendant has enough assets for the plaintiff to recover. Following this logic, people with substantial means (or people who are heavily insured) are targeted in unfair proportions by creditors and plaintiffs. Couple this notion with the fact that most state laws prohibit a person from enjoying the use of his/her property while at the same time keeping that property out of the reach of creditors. This is where asset protection planning comes in. Asset protection generally involves removing assets from one’s ownership (in order to prevent creditors from being able to reach them), but still being able to benefit from such asset in some way. The Lifetime QTIP trust demonstrates this concept well. Say that a husband settles a Lifetime QTIP trust for his wife, with himself as trustee. He is making a completed gift to the trust. Because he is making a completed gift, the property is no longer his-it is being held in trust first for his wife, then second for his children (or whomever). So if a future, unforeseen creditor comes looking for the husband’s assets, they will not be able to reach the assets in the Lifetime QTIP trust. However, sometime in the future, husband needs to pay off the house or purchase a new boat (or whatever), he can distribute money to his wife, so his wife can make the purchase (thereby benefiting himself).
Asset protection is not “asset hiding.” Hiding assets from a creditor is not lawful. The objective of asset protection is to move your assets out of your reach so if you need to take a debtor’s exam, you can honestly say that you do not own “x” asset, or that you are not a beneficiary of a trust, etc.
Asset protection planning is something that must be done ahead of any foreseeable creditor arising.
Asset protection has gotten somewhat of a bad rap in the media, largely because of a few high-profile cases where criminals tried to stash their ill-gotten assets in an offshore trust. True, if you acquired your assets by running a Ponzi scheme, probably no level of asset protection can protect your assets. But for the average citizen, asset protection can help.