From Wikipedia, the free encyclopedia
Asset Protection (sometimes also referred to as debtor-creditor law) refers to a set of legal techniques and a body of statutory and common law dealing with protecting assets of individuals and business entities from civil money judgments.
United States federal bankruptcy laws and ERISA laws exempt certain assets from creditors, including certain retirement plans. All fifty states also have laws that exempt certain assets from creditors. These vary from state to state, but they often include exemptions for a certain amount of equity in a personal residence, individual retirement accounts, clothing, or other personal property.
All fifty U.S. states also have laws that protect the owners of a corporation, limited partnership, or limited liability company from the liabilities of the entity. Many states limit the remedies of a creditor of a limited partner or a member in an LLC, thereby providing some protection for the assets of the entity from the creditors of a member.
All fifty U.S. states provide some protection for the assets of a trust against the creditors of the beneficiaries. Some states allow asset protection for a self-settled trust (a trust in which the settlor or creator of the trust is included as a potential discretionary beneficiary) and some states do not.
Creditors have several tools to overcome the laws that provide asset protection. First, there are federal and state fraudulent transfer laws.[1] Then, there are laws which allow a creditor to pierce the corporate veil of an entity and go after the owners for the debts of the entity. It may also be possible for a creditor of a member to reach the assets of an entity through a constructive trust claim, or a claim for a reverse piercing of a corporate veil.
Asset protection planning requires a working knowledge of federal and state exemption laws, federal and state bankruptcy laws, federal and state tax laws, the comparative laws of many jurisdictions (onshore and offshore), choice of law principals, in addition to the laws of trusts, estates, corporations and business entities. The process of asset protection planning involves assessing the facts, circumstances, and objectives of an individual, evaluating the pros and cons of the various options, designing a structure that is most likely to accomplish all the objectives of the individual (including asset protection objectives), preparing legal documents to carry out the plan, and ensuring that the various legal entities are operated properly in accordance with the laws and the objectives of the individual. This process involves providing legal advice and legal work and most states prohibit the practice of law without a license.
Asset protection planning began to develop as a stand-alone area of the law in the late 1970s. It began coming into prominence in the late 1980s, with the advent and the marketing of offshore asset protection trusts. Colorado attorney Barry Engel is credited with the introduction of that concept and the development of asset protection trust law statutes in the Cook Islands.[2] The most distinctive feature of the offshore trust is the fact that the settlor or creator of the trust may be included among the potential beneficiaries of the trust without causing the assets of the trust to be subject to the creditors of the settlor. This is often referred to as a "self-settled trust."
Over the years, this new field of law enjoyed a marginal reputation, but started going mainstream in the mid-1990s. A 2003 article in the Wall Street Journal claimed that 60% of America's millionaires have considered engaging in asset protection planning.[3]
Choice of law rules in the United States make it possible for a person from any state to create a trust, corporation, limited partnership or limited liability company that is governed by the laws of any other state or jurisdiction. Because of this ability to "forum shop," various states and other jurisdictions have modified their laws to allow greater asset protection in order to make them competitive with other jurisdictions.
In most states, the assets of a self-settled trust are not protected from the creditors of the settlor. In 1997, the State of Alaska passed a statute which provided that the assets of an Alaska self-settled trust are not subject to the creditors of the settlor.[4] Since 1997, the following states have adopted legislation allowing for a self-settled asset protection trust: Nevada, Delaware, South Dakota, Wyoming, Tennessee, Utah, Oklahoma, Colorado, Missouri, Rhode Island and New Hampshire. There is considerable debate about the comparative effectiveness of the asset protection provided by the laws of each jurisdiction, onshore and offshore.
Similary, the asset protection features provided by corporations, limited partnerships and limited liability companies vary from jurisdiction to jurisdiction. Once again, Alaska's limited liability company statute provides innovative advantages over other states. Case law from North Carolina demonstrates the asset protection advantages of a transfer to a limited liability company (see Herring v. Keasler, 150 NC App 598 (01-1000) 06/04/2002).
Just as the Cook Islands have developed a reputation for the best offshore jurisdiction for an asset protection trust, Nevis stands out in the competition for the best jurisdiction to file a limited liability company. The Nevis limited liability company statute is based on the Delaware limited liability statute, but they have a few added advantages. One advantage of a Nevis LLC is that the members and managers are not disclosed to the public.
There is some debate over the ethics of asset protection planning. On hand, every attorney that creates a trust, corporation, limited partnership, or limited liability company is engaging in some form of asset protection planning. On the other hand, most would agree that it is ethically inappropriate to assist a person to commit fraud or evade income taxes. The timing and the purposes of the plan seem to be the determinative factors as to whether a plan will be considered ethically and legally appropriate. In recent cases, individuals have gone to jail for contempt of court for failing to unwind a plan that a judge felt was repugnant to our principals of law and justice.[5]
