Let's start with the basics. To lawsuit-proof a client's assets, we would normally use one or more of three basic strategies. The first strategy is to own onlyexempt assets. The strategy here is to own as many assets as possible that are automatically protected from creditors under federal or state law. A surprising number of assets are automatically exempt or immune from creditor seizure. For example, your state law may exempt all or part of your home equity, retirement plans, insurance, annuities, wages and certain personal property. The converse objective is to own few or no assets that are not exempt and self-protected. We will later expand upon this exemption strategy through numerous examples.
The second strategy is to title non-exempt or unprotected assets to one or more protective entities. When you title your assets to one or more protective entities, a judgment creditor cannot seize those assets. We have many different protective entities and arrangements to choose from: co-ownerships, corporations, irrevocable trusts and COPE's (limited partnerships and limited liability companies), as well as numerous international or financial entities. We'll talk about these and other protective entities and strategies throughout this newsletter.
The third strategy is to fullyencumber orequity stripyour assets. The goal here is to reduce your assets' value to your creditor by mortgaging your exposed assets and protecting the proceeds. We'll also tell you about a number of different ways to accomplish this.
We often combine these strategies. For example, we may title an asset to a protective entity, then equity strip the same asset and invest the proceeds in an exempt asset or safekeep the proceeds in still another protective entity. Most plans involving significant assets combine these three strategies or 'firewalls,' as we call them. The possibilities are endless. And there are other strategies – usually more of a financial nature – that can also be blended into a plan.
Each of the above strategies fall into the category of either transfer-based asset protection or transferring an asset out of a creditor's reach, or transformational asset protection which is transforming the asset into something a creditor couldn't get or wouldn't want. For example, part of one's salary can be placed into an ERISA-governed plan (401(k), etc.) that is exempt from creditors. Although this involves exemption planning, it also involves transferring cash into an ERISA-governed plan, and is therefore transfer-based protection as well. Another method involves using exposed cash to prepay certain expenses or repay favored creditors provided those creditors aren't 'insiders' under applicable fraudulent transfer or fraudulent conveyance law. For example, one could take exposed cash and use it to pay in advance for a 5-year commercial lease. Such techniques, which results in the right to use an asset – the leased property – which right most creditors wouldn't want, exemplifies transformational asset protection.
Nearly every asset protection strategy relies upon one or more of these three core strategies which independently or simultaneously utilize either a transformational or a transfer-based methodology.