An Introduction To Asset Protection

by Fred R. McMorris, Attorney-at-Law

September, 2003

Almost every routine activity, confrontation, or interaction with another party carries with it an ever increasing chance that a claim may be filed against you.  A study completed at the end of 1999 revealed that filing a lawsuit is viewed as the second fastest way to strike it rich today, behind winning the lottery and ahead of receiving an inheritance.

It is estimated that 80 million lawsuits are filed in the United States each year -- an average of 152 each minute.  Many lawsuits are filed by lawyers willing to pursue a claim on a contingency basis.  Lawyers choose which claims they are willing to pursue under a contingent fee arrangement based in part, on the likelihood that there will be enough assets to pay a significant settlement or a judgment.

Today, business insurance to cover the nature and extent of any claim made against you may very well not be adequate.  It can be disconcerting if a claim made against you is not covered by your policy or the claim exceeds your insurance policy limits.

Most contingent fee plaintiff's lawyers will do a "cost-benefit" analysis before they accept a case. They will be unlikely to pursue a claim against you if they can't find enough assets to make their efforts worthwhile, or if it will be too time consuming or difficult to collect on any judgment.

You can help safeguard your business through a sound asset protection plan.  Asset protection planning simply means taking steps to preserve your assets before they are threatened.  It means planning now to reduce or eliminate adverse consequences from lawsuits or other claims that may be made against you in the future.

An asset protection plan has two goals: (1) to make the collection of any judgment against you difficult, if not impossible; and (2) to allow your input into who will enjoy the benefits of your protected assets.  The concept of protection of assets from risks associated with vocational and occupational hazards, and with the endeavors of daily life, is an attractive concept worthy of exploration in every financial planning discussion.

Use of corporations and contemporary limited liability entities are widely used today in an anticipation of the need to separate oneself from the business operation.  However when used in conjunction with irrevocable domestic or foreign asset protection trusts these entities can offer you a tremendous amount of protection from the threat of litigation against you and your business.

Defensible asset protection planning is done before a claim is known and must not run afoul of the "fraudulent conveyance rule."  Enforcement of that rule prevents people from trying to escape liability by transferring assets out of their control after they become aware of a claim.

To avoid the fraudulent conveyance rule, a transfer of property cannot be made with an intent to hinder creditors.  The first consideration in determining whether or not a transfer was made "with actual intent to hinder creditors" is whether or not the person knew of the claim at the time they made the transfer.

The cases interpreting this phrase point out the distinction between potential and known claimants and potential but unknown claimants.  The difference between these two groups is not always clear, but a good general rule is: potential and known claimants are those that you don't yet owe money to, but to whom it is reasonably foreseeable that you could owe money in the future.  Potential but unknown claimants are those that you do not owe any money to, and to whom it is not reasonably foreseeable that you could owe anything in the future.

Other considerations as to whether a transfer will withstand scrutiny under the fraudulent conveyance rule include whether the transfer of your assets was to an "insider" (such as a wife or relative, which is not recommended for true asset protection), whether the transfer of your assets was concealed, whether you transferred all or substantially all of your available assets, and whether you retained "control" over the assets you transferred.

It is extremely important to understand the "control" element in the asset protection context.  To avoid application of the fraudulent conveyance rule the property must leave your "control" but this does not mean it must leave your possession.  If you retain the ability to control the property you "transferred," a claimant or creditor may be able to take that property to help satisfy any judgment against you.

The best time to consider asset protection planning is before you need it.  Asset protection planning is like getting a bank loan -- you can't get it when you need it, but it's easy to get it if you don't.  If a lawsuit or other claim has already been threatened or filed, your options to protect your assets from that claim are extremely limited.  On the other hand, if you begin your planning and create an asset protection structure before any claims are made, then your options are numerous.

A coordinated and integrated approach to both the protection of your assets during your life and long-term estate planning should be considered.  Estate planning is the process of analyzing the assets accumulated during life and formulating a plan of distribution.

One of the primary goals of estate planning is to protect estate assets at death for the benefit of others: your heirs, beneficiaries, and the "objects of your bounty." Use of an integrated asset protection and estate-planning strategy looks at and beyond traditional post-mortem planning.  It looks at how you manage your assets today and how that management can be structured and coordinated to maximize flexibility in the event of unforeseen events and minimization of estate taxes.  Creating a comprehensive asset protection and estate structure necessarily involves the use of several legal disciplines.

As previously stated, there are on average, 152 new lawsuits filed every minute of each day.  Because of the litigious nature of our society you should become aware of the benefits of instituting a plan and the options you have to protect your assets.  That plan should be prepared and implemented before a problem claim arises.  If done properly, you can protect your assets from the claims of potential but unknown claimants.  Although several different strategies are available for you to create an effective asset protection and estate planning structure, each person's circumstances are different -- so your priorities will dictate your individual strategy and the most advantageous plan for you.

[This information is intended for informational and educational purposes only.  It is provided with the understanding that neither the author nor anyone from The North American Fidelity and Fiduciary Company is rendering legal advice to any reader of this article.  Everyone should seek counsel based upon specific facts before taking any action based upon any information in this article.] 

Attorney Fred McMorris serves on the advisory board for The North American Fidelity and Fiduciary Company, which specializes in providing asset protection and preservation strategies.  For more information about asset protection strategies contact John McConnell at 540-371-7197. 

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