Often so very misunderstood, and generally regarded in some quarters as “playing dirty, “the concept of asset protection is sometimes one of last resort for a business owner. However, in truth, asset protection planning is essentially risk management planning designed to discourage a potential lawsuit before it begins, or to promote a settlement most favorable to an attorney’s client. The goal of this continuing series of articles, is to give the reader a better understanding of what his or her options are, and why these options should be an integral part of any business plan, rather than a mere afterthought.
Asset protection planning is like writing a script for a Broadway play. The story must be one that puts the client on the high road, so that when the court or jury rules in the client’s favor, it will be because it was the only logical and fair conclusion to render. Remember, the law generally frowns upon asset protection. No one has an inherent right to protect his/her assets from creditors, other than what state law or federal bankruptcy law provides, and even these laws provide only limited exemptions for debtors.
Rather, much of asset protection takes advantage of legal loopholes in the same way that many income tax shelters attempt to take advantage of the tax code. Essentially there is an attempt to exploit the unintended effects of the law in order to prevent a creditor from reaching assets of a business and ultimately taking control of the business. Its goal is to provide the creditor only the means of obtaining a court order charging the debtor’s interest with the debt (charging order), so that the creditor will receive distributions by the debtor, when and if, they are taken by the debtor in the future.
Well thought out asset protection plans will get defendants out of litigation quickly, or at least isolate the litigation so that it can be managed efficiently, thus leaving the client to devote his or her energies to the goal of making money. Therefore, the real underlying goal of this risk management asset protection planning concept, is to anticipate and deter legal problems efficiently should they arise, rather than solely attempting to avoid them altogether. In other words, if the asset protection planner does a good job, the plan that results will allow his/her client to avoid risks or, if risks do indeed materialize, the resulting plan will contain and manage those risks, thus allowing the client to settle a dispute quickly.
It is important to remember that among legitimate practitioners, asset protection planning requires an expertise in several areas of the law. Principally speaking, asset protection planning must include business entity law as well as trust and estate law. Naturally, having a practitioner on your side who is litigation-tested and who is more than familiar with civil procedure in your jurisdiction, is of indescribable value. Accordingly, asset protection planning should be integrated with estate protection planning, which fundamentally involves the protection and management of wealth over an extended period of time. But remember, simple trusts are not asset protection tools in and of themselves. The irrevocability of the trust and its potential for incorporating asset protection planning tools, quite often, is the cornerstone of marrying both asset protection and estate protection planning.
Finally, the relationship between asset protection and insurance is rarely discussed and is generally misunderstood. Any practitioner who advises you to get rid of your insurance coverage altogether is not, in my opinion, providing you with sound advice. Such advice fails to recognize that an insured individual has very little financial stake in whether an insurance company pays a claim, other than the possibility of future increases in insurance premiums. Such advice also fails to recognize that a plaintiff’s attorney focuses closely on reaching settlements with insurance companies and then moving on to the next case, instead of expending money fighting a protracted lawsuit. Likewise, a business owner should have as his or her main motivation, the goal of getting rid of the lawsuit and getting back to making money, rather than spending an incredulous amount of time fending off creditors.
Likewise, it is important to understand that proper asset protection planning will protect your personal assets from a lawsuit filed against your business. Insurance coverage, minus any deductible required to be paid pursuant to a valid claim, is in place to protect your business assets. These are two very distinct concepts, which are often overlooked. The goal of having sound insurance coverage is to create a situation where a claimant is more than likely to accept the limits of the insurance coverage in settlement of a claim, even if the claimant’s potential for recovery in court might be greater than the limits provided by the insurance coverage itself.
The goal of this series is to explain different principles upon which asset protection planning rests. In this article, we have explored concepts of exactly what asset protection planning is supposed to be, as well as the concepts behind its institutional structure. In the next article, I will explore in what specific scenarios asset protection planning may be of particular significance.