Know What Asset Protection Is All About
Asset protection seeks to protect your assets from being taken under an unfair or unjust court action against you. In this article I’ll orient you to the nature of such court actions, how they’re enforced, and protection strategies to address them.
Now I agree that the ability to get justice for private transgressions and contract failures is essential to freedom. But some plaintiffs and their lawyers seek and receive unfair judgments against defendants because of unjust court procedures that transgress constitutional rights – such as does our family court system.
Additionally, people with wealth are often targeted as defendants with ‘deep pockets’. They’re continually threatened with frivolous lawsuits to see how much they’ll settle for.
Threatened litigation, unfair, or enormous judgments can destroy a person’s life and legacy. It can relegate a person to a life of poverty – a form of ‘civil’ punishment for never doing anything wrong.
Two goals for setting up protection of your assets from lawsuits are:
1) To make it appear that you have no assets. This minimizes being targeted in a gratuitous lawsuit, and
2) To prevent, limit, or hinder a plaintiff’s ability to seize your assets in satisfaction of a presumably unfair court order.
Legal considerations on enforcement of a judgment:
Judgments are enforced against you in the country you reside. Other countries are not required to enforce a U.S. judgment. A U.S. judgment must be re-filed in the new country and that country must conclude that it wants to uphold the U.S. judgment against you.
To force you to pay a judgment, the court must find you have the ability to pay it, and then it can enforce the judgment by seizing your assets. What can be seized is anything you own or control for your own benefit. If the court believes you have assets, but the court can’t find them, it can seize you under ‘a contempt judgment’ for your not delivering the money ordered.
The U.S. makes a distinction between creditors. Your bankruptcy creditors have limited claims against you. They cannot or have limited access to assets you have in certain qualified plans – such as a 401(k) or an IRA.
Creditors seeking child support or alimony judgments have unlimited claim to all your assets. These judgments cannot be forgiven by the court – even if the defendant can’t pay the money ordered!
Strategies for protecting your assets often use one or more legal entities (trust, corporations, limited liability companies, family partnership, etc.) to shield your assets from your ownership or control of them. This may prevent or limit a winning plaintiff from seizing them.
Asset protection entities and strategies fall into two categories according to the assets’ location. A)Domestic strategies using a legal entity formed within one of the states with favorable defendant or debtor protection laws.
B)Off-shore strategies with a foreign legal entity and jurisdiction that places assets in a foreign country – outside the reach of creditors and the U.S. court system.
Domestic asset protection relies on your legal entity that controls or owns your assets to protect those assets from seizure. Under a court challenge you’d have firm statutory and case law supporting the legal entity’s claim to retain the assets.
Offshore asset protection seeks a similar scheme of protection.
If the court finds that the entity you created is a sham and that you can take control the assets, then the court can simply seize those assets or order you to deliver those assets to the plaintiff.
If the entity you created is valid, then the court can decide is if you fraudulently transferred your assets to this entity. A fraudulent transfer occurs if you transfer assets within 2 to 4 years – depending on the state – of the time a claim for those assets is filed. If so, then this asset protection strategy will fail and your assets will be seized.
You need to transfer those assets long before any claim against you is contemplated to protect against a fraudulent transfer claim.
Enforcement of Judgment within the U.S or off-shore:
Here is where the ‘domestic’ location differs from the ‘off-shore’ location strategies. The U.S. can easily enforce its judgment for assets within the U.S. since it has jurisdiction there. But the ability to seize those ‘protected assets’ when they’re outside the U.S. is significantly reduced or nullified.
If you’re ordered to produce off-shore assets -or its equivalent value – and you refuse, then you can be seized under a contempt of court order and jailed until you produce them. Of course, that can happen only if you’re within the U.S. jurisdiction.
The earlier you begin an asset protection strategy, the better off you’ll be. And, if no one knows you have assets, then ‘all the better’.
Shane Flait is an educator and writes on financial, legal, and tax issues. He tells you what the issues are all about and gives you workable strategies to accomplish your goals. Find out more and get a free report on Managing Your Retirement =>
You can contact him at firstname.lastname@example.org
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