In estate planning, one recurring theme of clients is asset protection.  Unfortunately, expensive lawsuits and costly judgments are becoming more common.  Asset protection can take many forms, from simple to complex and the proper approach  will vary from client to client based on their respective needs. While complex estate  planning methods such as off shore trusts exist, often less expensive options are available  and effective. Below I review typical asset protection strategies from simple to complex.

Asset Titling.  

One inexpensive method for protecting assets is to have assets owned by a low target individual. For instance, in a marriage where one spouse is in a high risk  occupation and another spouse is not, it is quite common to see the residence and other  personal assets owned solely in the name of the low risk spouse. In so doing, should the  high-risk spouse be sued personally, the family assets are less likely to be subject to the  lawsuit because they are in the name of the spouse. For instance, if one spouse is a  surgeon (high risk) and the other spouse is a secretary at a large corporation (low risk),  titling of the home in the name of the secretary provides an additional layer of asset  protection. 

When engaging in this form of asset protection planning, there are a few things to  keep in mind. First, titling of the assets should not go contrary any premarital agreement  or other form of marital asset ownership planning. In addition, removing assets from one 

individual’s name may reduce that individual’s asset base for financial purposes, such as  for qualifying for loans.  

Umbrella Insurance.  

Another inexpensive form of asset protection is the purchase of umbrella  insurance. Umbrella insurance is typically offered through the homeowner’s insurance  policy. Umbrella insurance is inexpensive and can increase the insurance coverage of the  individuals, thereby reducing the risk of personally liability in the event of a lawsuit.  

When purchasing umbrella insurance, it is important to review the exclusions  from the insurance to know what the insurance covers and what it does not. The costs  and coverage of different policies should be reviewed for cost effectiveness.

Limited Liability Companies for Risky Assets.  

To the extent that you own assets which are potentially more prone to liability  risk, you should consider placing those assets in a limited liability company. For instance,  rental real estate is a good candidate for ownership in a LLC because of the risk of  lawsuit of renters and their invitees. By holding these assets in a LLC, the potential for  personal liability associated with the property owned by the LLC is greatly diminished.  

When working with limited liability companies, it is important to also consider  the cost versus benefit of the companies. In many states, such as Utah and Colorado, the  formation and maintenance of a LLC is very inexpensive. However in other states, such  as California, which has a minimum franchise fee of $800 per year, limited liability  companies can be cost prohibitive. In addition, LLCs do not protect an individual from all  claims. You need to respect the formalities of the LLC to avoid having the veil pierced.

Gifting to children and others. 

To the extent you have assets in excess of your foreseeable needs, you may  consider gifting assets to children or others in order to reduce your overall net worth.  This serves two purposes. First, a lower net worth reduces your attractiveness as a  potential lawsuit target. In addition, by having multiple owners of assets, obtaining a  judgment against the assets for the claims of a single owner is more difficult.  

When considering gifting it is important to keep in mind that once you gift the  assets to others, you no longer have ownership of those assets. This means the assets are  not considered yours for financial purposes, such as obtaining loans. In addition those  assets are not available to care for you should such a need arise. There may also be  transfer tax consequences associated with these gifts.  

Domestic Asset Protection Trusts. 

A relatively new asset protection tool is the Domestic Asset Protection Trusts.  DAPT’s are a new vehicle which allow a client to place certain assets in this trust but still  have some access to or use of the assets. Assuming the formalities and legal requirements  of the DAPT have been followed, the assets therein would not be subject to the claims of  the client’s creditors, even though the client is both the grantor and a beneficiary of the  trust. (In the past, such self-settled trusts were subject to the claims of creditors).  

When forming a DAPT, it is important to follow all of the requisite requirements  for the formation and the operation for the trust. Since these trusts are state law governed,  it is important to determine the desired state and follow the requirements of that state. In  addition, please note that these states have various time frames for fraudulent  conveyances, meaning that the assets must be held by the trust for a certain period of time  before those assets are outside the reach of creditors. In addition, DAPTs require an 

independent trustee and as such access to and use of the assets by the client may be  limited in some respects. DAPTs are fairly new and as such the ability of these trusts to  protect the client against creditors is unsettled, especially with respect to federal lawsuits;  clients should be made aware of this prior to forming a DAPT. Also, there are substantial  costs in forming and maintaining a DAPT. 

Foreign Asset Protection Trusts 

Finally, a client may form a Foreign Asset Protection Trust. This type of trust, as  the name suggests, is formed in a jurisdiction other than the United States. The ability to  collect on a judgment against the asset of an FAPT is limited based on the laws of the  foreign country. Hence assets held in an FAPT may be difficult to reach for satisfying a  judgment. 

However, the risk likewise is that you must give up control of the assets, and  further, you do not have the benefit of United States law against the abuses or potential  abuses of a foreign trustee. There are substantial costs in forming and maintaining an  FAPT. Also FAPTs should not be used as a method to attempt to circumvent federal  income taxes. 

Summary 

There are a number of methods of Asset Protection Planning available to the  client. Cost and complexity are factors to be considered when deciding which Asset  Protection Planning methods are best in a given situation.