Asset Protection

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Asset Protection

Table of content:

Let’s start from the top,

You need to be proactive if the IRS threatens to issue a lien or levy on your assets. Ideal Tax asset protection strategies include several methods that protect assets from liability arising from a tax audit. It is not to be confused with limiting liabilities, which refers to the ability to limit or stop liability for the asset or activity that it arises.

Few assets are protected from creditors by law. Examples include equity in your home, certain retirement plan investments, and interest in LLCs or limited partnerships. Even these assets are not always possible to access. Assets that one doesn’t legally own are usually unavailable. It is possible to transfer legal title to assets to a trust, agent, or nominee in many cases. However, you retain all control.

Asset protection has a similar goal to bankruptcy and both areas of practice go hand in hand. If a debtor is insolvent or has few assets, bankruptcy may be the best option. Asset protection is a good option if the debtor has substantial assets. Talk to one of our tax analysts to discuss your assets and liabilities and help you determine the best path to reduce any liens on your assets.

What is Asset Protection Law?

What is Asset Protection Law?

Asset Protection, also known as Debtor-creditor Law, is a collection of legal techniques and a body common that focuses on protecting assets from individuals and businesses from civil money judgments. Asset protection planning is designed to protect assets from creditors, without perjury and tax avoidance.

Asset protection refers to the various methods that can be used to protect assets against liabilities from elsewhere. It is not to be confused with Limiting Liability. This refers to the ability to limit or stop liability for the asset or activity that it arises. There are very few assets that are protected from creditors by law. Common examples are home equity, certain retirement plans, interest in LLCs, and limited partnerships. Even these are sometimes difficult to reach. Assets to which one doesn’t have a legal title are almost impossible to reach. It is possible to transfer legal title to assets to a trust, agent, or nominee in many cases. However, the trustee retains all control.

Asset protection is similar to bankruptcy. Both areas are closely related. The bankruptcy route is preferred if a debtor does not have enough assets. Asset protection is more practical if the debtor has substantial assets.

These are the four threshold factors, which are either implicitly or explicitly analyzed in every asset protection case:

    1. The identity of the person involved in asset protection planning
      • Is the debtor an individual? If so, is the spouse also liable? Is it possible to make a transmutation agreement if the spouse is not liable? Is it possible to enter into a transmutation agreement if the spouses are engaged in activities that are equally likely in resulting in lawsuits? Or is one spouse more likely than the other to be sued?
      • Did an individual or entity guarantee the entity’s debt if the debtor was an entity? Is it likely that the creditor can pierce the corporate veil and get assets from the owners? Is there any statute that makes the individual personally responsible for the obligations of an entity?
    2. The claim’s nature
      • Is there any specific claim or is the asset protection taken to protect yourself from lawsuits?
      • What assets are enumerable by the judgment if the claim is reduced to a judgment?
      • Is the claim voidable
      • What is the statute of limits for filing a claim?
    3. The identity of the creditor
      • How aggressive is the creditor?
      • Is the creditor a government agency or an individual? Is the taxing authority? Certain government agencies have the power to seize property that other agencies don’t.
    4. The nature of the assets
      • In what manner are assets exempted from creditors’ claims? The homestead exemption and the exemption of assets in qualified plans, i.e., how much protection is provided by it. assets in a plan that is subject to the Employee Retire Income Security Act (ERISA).

While Trusts can be beneficial in some cases, the question of ownership can still exist. Although legal ownership has been transferred to trustees, the Trust settler may still have beneficial ownership. A private Placement Life Insurance contract, (PPLI) can offer greater privacy and protection than most Trusts and can be combined with existing trusts if needed. Whilst Trusts may not be recognized in many Jurisdictions, Life insurance also has the advantage of being multi-jurisdictional.

The various digital inheritance is another multi-jurisdictional method for protecting assets.

Asset Protection Law in the US

Asset Protection Law in the US

Certain assets are exempted from creditors by the United States federal bankruptcy laws. There are laws in all 50 states that exempt assets from creditors. They vary from one state to the next but often include exclusions for certain equity in personal residences, individual retirement accounts, clothing, or other personal property.

The owners of limited partnerships, corporations, and limited liability companies in all fifty states have protection from liabilities. Many states limit the rights of creditors of limited partners or members of an LLC. This provides some protection for assets from creditors.

All 50 U.S. States provide some protection to trust assets against creditors. Some states permit asset protection for self-settled trusts (trusts in which the creator or settlor of the trust is included as a possible discretionary beneficiary), while others do not.

Creditors have many tools available to get around laws protecting assets. First, there are federal as well as state fraudulent transfer laws. There are currently two types of fraudulent transfer law in place: the Bankruptcy Code (or state fraudulent transfer statutes). The Uniform Fraudulent Transfer Act has been adopted by most states. It defines fraudulent transfers. Both the UFTA (Bankruptcy Code) and the UFTA define fraud as a transfer by a debtor to a creditor if it is made with the “actual intent to hinder, delay, or defraud any creditor of that debtor”. Although UFTA applies to current creditors, it does not distinguish between future creditors and potential creditors. UFTA is generally held to only apply to future creditors, and not future potential creditors. This applies to all claims that arise after the transfer, but where there was no foreseeable connection between the debtor and the creditor at the time.

Some laws allow creditors to break through the corporate veil and pursue the owners of the entity for their debts. A creditor may be able to access an entity’s assets by bringing a constructive trust case or a claim for reverse piercing.

Business Owner’s Asset Protection law

You probably know that owning and operating a business is fraught with risks and pitfalls. You can’t just make a profit; you must protect your business against lawsuits and claims. You must manage the following risks: mortgage obligations to third parties and suppliers, claims for damages resulting from your employees, product liability or professional liability, as well as consumer protection issues. These risks can lead to the loss of your business and personal assets if they are not managed properly. You can manage your business effectively by knowing the risks that you face and how you can minimize them.

What is the importance of asset protection?

A comprehensive asset protection plan’s goal is to reduce or eliminate risk by protecting your personal and business assets from creditors. Many small-business owners don’t realize the risks and options that could harm their business. A plan to protect your assets and deter potential claimants is called asset protection. It can be put in place before a lawsuit or claim. Don’t delay if you don’t have an asset-protection strategy in place. The more time a plan has been in place, the more likely it will be to last.

Asset-protection strategies use separate legal structures such as corporations and partnerships. Your assets and the type of creditors that are most likely to make claims against them will determine the best structure for you.

Internal and external Claims on Assets
Creditors can only sue for internal claims if they have the assets of one entity (e.g., a corporation). If a corporation owns real property, and someone falls on it, the liability of the injured party is to pursue the assets of the corporation (i.e., the real estate). This assumes that you didn’t cause the injury.

External claims can be made against you as well as the assets of an entity. If you were the owner of a truck belonging to the same corporation and you negligently drove it into pedestrians, you could be sued by the injured as well as the corporation. Any judgments from corporate assets can also be satisfied from your assets.

You will be able to plan better and protect your property and wages from garnishment. You should also know which assets are most vulnerable to claims.

Asset Types
A dangerous Asset is a type of asset that, by its very nature, presents a significant risk of liability. Rental real estate, commercial property, and business assets such as tools and machinery, are all examples of potentially dangerous assets. Protective assets do not encourage a high degree of inherent liability. Bonds and stocks as well as individual bank accounts are not subject to risk.

Because they are low-risk assets, you can either own them individually or jointly. You don’t want to combine dangerous assets with other assets or safe assets. Separate ownership of dangerous assets reduces the risk of losing them.

A medical practice, for example, has an obvious, inherent risk liability. Did you know that the building where the practice is located may be considered a potentially dangerous asset? You or the same entity may be liable if the building and the practice are both owned by you. This could expose both your livelihood as well as your property to loss.

Asset-protection strategies

Asset-Protection Strategies

Over the years, many strategies claim to protect assets. While some of these strategies use established legal entities to accomplish their purpose, others are nefarious, illegal, or promote a money-making scheme on the uninformed. Trusts, partnerships, corporations, and partnerships are some of the most common legal instruments used to protect assets.

Corporations are a type of business organization that is created by state law. The legal ownership of the corporation is in the shareholders. This is evidenced by stock shares. Each shareholder has the right to elect a Board of Directors responsible for the overall management and supervision of the corporation. The officers, which include the president, secretary, and treasurer, are elected by the board of directors. They have the authority to manage the corporation’s day-to-day operations. In many states, one person can serve as the sole director and hold all corporate offices.

There are many types of corporations that can be used to protect assets. These include business or C Corporations, S Corporations, as well as limited liability corporations (LLCs). Corporations are a great asset-protection tool because they have limited liability for their directors, officers, and shareholders (principals). Corporate principals are not personally liable for corporate debts, breach of contract, or personal injuries to the third party caused by the corporation, its employees, or agents. A creditor can only pursue corporate assets to settle a claim. While the corporation might be held liable or responsible for certain claims, it is not obligated to do so. Corporate debts cannot be claimed or seized from the assets of corporate principals. This protects the corporation against personal liability and distinguishes it from other entities such as trusts or partnerships.

Providers of personal services are one exception to the limited liability of corporate directors. Personal service liability covers work performed for or on behalf of another person by lawyers, accountants, and financial professionals. A doctor may still be liable for damages resulting from the treatment of a patient if he forms a corporation or works as an employee.

A corporation can only offer liability protection if it is a distinct and separate entity from its officers or shareholders. A creditor may try to show that a corporation does not act as a separate entity, but rather as its alter ego or officers. This strategy, known as piercing the corporate veil, allows the creditor access to assets owned by shareholders if it is proven to be successful.

S Corporations

An S corporation is similar in structure to a C crop, except that it can make a tax-exempt special IRS tax choice to allow corporate profits to pass through the company and to be taxed at the shareholder level. S corporations have the same liability protection as C corporations, but the S corporation must meet additional requirements.

Limited Liability Corporations

This entity was created due to the additional formalities that were imposed on S-corporations. This entity was created due to the additional formalities imposed on S corporations.

General Partnership
A general partnership refers to an association that includes two or more people who are involved in business activity. The agreement can be written, or oral. A general partnership is an asset-protection tool. Each partner is responsible for all debts, even those incurred by others on behalf of the partnership. With or without the knowledge or consent of other partners, anyone partner can act for the benefit of all others.

This unlimited liability feature contrasts with limited responsibility for the owners of a company. Each partner is responsible for any negligence of the other partners. Each partner is also personally responsible for any obligations arising from the partnership.

Limited Partnership
A limited partnership is authorized by state law. It consists of one or two general partners as well as one or several limited partners. A person can be both a general partner and a limited partnership. If at least two legal entities or persons, such as corporations, are involved in the partnership, they are considered to be one partner. The general partner manages the affairs of the partnership. He or she is liable for all obligations and debts.

The limited partners are not personally liable for any debts or obligations of the partnership, other than their contribution to it. This protection means that limited partners have very little control over the management of the partnership. A limited partner who takes an active part in managing the partnership may lose their limited liability protection. They will be treated as a general member. The value of limited-partnership shares is diminished by this restricted control.

A trust is an agreement between whoever created the trust (referred to as the settlor or grantor), and who will manage the assets of that trust (the trustee). The trust stipulates that the grantor will transfer certain assets and assets to the trustee. The trustee will then hold and manage these assets for the benefit of the beneficiary. An intervolves trust is created during the lifetime of the grantor. A trust created at death through a living trust or will is called a testamentary trust.

Trusts can be used for many asset-protection strategies. However, there are only two types of trusts. An irrevocable trust is one where the grantor has the option to amend or dissolve the trust, or even cancel it entirely. An irrevocable trust does not give the grantor such rights. This is precisely what makes the irrevocable trust an effective asset-protection tool. Assets you don’t control or own are not subject to your liability.

The Best Asset Protection Vehicles

Trusts can be used for many asset-protection strategies. However, there are only two types of trusts. An irrevocable trust is one where the grantor has the option to amend or dissolve the trust, or even cancel it entirely. An irrevocable trust does not give the grantor such rights. This is precisely what makes the irrevocable trust an effective asset-protection tool. Assets you don’t control or own are not subject to your liability.

Let’s now look at the most popular asset-protection schemes. We’ll then discuss which ones are best suited to protect specific types of assets.

Your risk of losing your business or professional practice is high. This makes it a very dangerous asset. Incorporating a business or practice used to be the best way for protecting your assets against liability and seizure due to claims against it. The limited liability company is quickly replacing the C corporation or standard business as the best asset protection entity. It offers more flexibility, efficiency, and cost-effectiveness, and provides the same protection.

Because LLCs are governed by state law, their filing requirements and protections may vary from one state to the next. However, most states have a state law that separates LLC owners and assets to protect them from liability for LLC activities.

However, not all business professionals can afford the LLC’s protections in every state. An LLC or corporation can’t protect professionals such as lawyers, doctors, psychiatrists, and dentists from claims arising directly from their actions.

You can shelter your assets in other entities if the business entity is unable to protect you personally. This includes a family Limited Partnership (FLP), trust, or LLC. Even if you are sued personally by creditors, at least some assets will be protected in one or more of these entities.

One final note to professional practitioners and business owners: It’s still worthwhile to incorporate with either a C-corporation or an LLC. These business entities will not protect you against malpractice claims, but they will shield you from the financial obligations of the corporation unless you guarantee the debt. Other claims that are not directly related to your professional activities, such as those of suppliers, employees, landlords, or tenants, may also be protected.

Selecting a General Partnership

The answer is almost always a clear “no.” You, as a co-partner are responsible for all debts and acts of other partners regardless of whether you were involved or not. Your exposure to business claims increases when you are a part of a general partner.

Protect your personal property if you are a part of a general partnership. You could lose everything just by being associated with the partnership or other partners.

The bottom line

 The creation and implementation of a comprehensive asset protection plan can affect almost all aspects of your business. The plan’s purpose is to safeguard your business assets within your business operations. It is possible to protect your business by using legal concepts and entities that are honest and lawful. It is not asset protection planning to deceive other businesses or individuals.

To create an asset protection plan that is most effective for you, consider hiring an asset-protection expert, such as Ideal Tax, (888) 224-3004

Ideal Tax Solution Representation

Ideal Tax Solution has the experience and knowledge to handle the most serious of tax audits. Our expert Tax Attorneys and Enrolled Agents will negotiate with the IRS on your behalf and ensure that your taxpayer rights are protected and that the IRS auditor is playing on a level field. Call us today to discuss how we can develop a strategy that will allow you to address the audit and resolve it with better than acceptable results.

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