This is a question we get asked on a regular basis. Along with this question is another one: Is it legal? The answer to the last question is, “Yes, it is legal, if done properly.” It is not legal if it is done in a fraudulent manner.
Asset protection planning is a process by which one organizes their financial affairs in such a manner as to safeguard assets from the risk of exposure. The process of asset protection involves transferring the assets from an unprotected form of ownership to a protected form of ownership. The unprotected form generally applies to property held directly in an individual’s name of even the name of a revocable living trust. The protected form can be one of many asset protection vehicles such as limited partnership, corporations, certain kinds of trusts, limited liability companies and other such entities. Protecting assets can also be a process of transferring them into exempt assets to the extent permitted by the individual states.
However, care is cautioned in utilizing exemptions as a form of asset protection. Certain creditors are not subject to state exemption. Some of these examples are federal tax liens, state tax liens, alimony and child support, purchase money retailers, and mechanics liens.
Due to the lottery style court cases and judgments that exist today, a well-drafted asset protection plan can go a long way in deterring a creditor. If you can avoid the appearance of being the “deep pocket,” then you can frequently be passed over and the creditor will look to someone else. In fact, deterrence is a major part of asset protection. The plaintiff is generally unwilling to mount countless attacks against a defendant who has a well-established asset protection plan. Judgment creditors are cost conscious and if the efforts to collect are just too difficult, then that creditor is likely to settle for far less than the amount of the judgment or move on to easier pray.