The ABC’s of Asset Protection Planning
Start Planning Before a Claim Arises
There are many things you can do that will effectively provide asset protection before a claim or liability arises, but few things that are effective afterwards. That’s because what you do after a claim rises could be undone by “fraudulent transfer” law. Moreover, the point at which a claim arises is earlier than a layman might think—it is, for example, usually much earlier than when a demand letter or a process server shows up at the door.
Late Planning Usually Backfires
Asset protection planning after a claim arises is apt to make matters worse; think of it as getting a flu shot while you have the flu, and the shot itself making you even more woozy. It is a common misconception that the only thing a judge can do is to unwind a fraudulent transfer, leaving a debtor who unsuccessfully tried late planning no worse off than if he had done nothing. To the contrary, both the debtor and whoever assisted in the fraudulent transfer can become liable for the creditor’s attorney fees, and the debtor can lose the hope of getting a discharge in bankruptcy.
Asset Protection Planning Is Not A Substitute For Insurance
Asset protection planning should not be a substitute for liability and professional insurance, but rather should supplement insurance. It is a myth that asset protection plans invariably scare away plaintiffs, and an asset protection plan doesn’t pay legal fees to defend against a lawsuit. Insurance also supplements asset protection planning, since it can help a debtor survive a claim a fraudulent transfer claim. If you get sued, let the insurance company pay to defend it and pay to settle it — that’s what you’re paying the premiums for.
Don’t Count On Bankruptcy
Once upon a time, bankruptcy was akin to a nice warm shower that allowed a debtor to wash all debts away while still retaining a goodly amount of assets. Not anymore. In 2005, the bankruptcy laws changed to become a cold acid bath that leaves debtors with bare bones and little flesh. State homestead exemptions have been substantially limited, and other new provisions in the bankruptcy code and new bankruptcy case law can make parts of asset protection plans very difficult to protect in bankruptcy. Plus, bankruptcy judges have some of the strongest powers to make debtors cough up assets.
Everything Sees the Light of Day
Asset protection planning should be based on the presumption that the entirety of the planning and its purpose will eventually become known to creditors, because one way or another it usually does. Asset protection plans that require secrecy will face a plethora of problems, from how not to disclose the structure or activity on tax returns, to how to keep a mad ex-spouse or disgruntled employee from talking to creditors. And don’t even think about going into bankruptcy without making a full disclosure about assets and transfers. The failure to make a full disclosure will usually lead to a denial of discharge, and the failure to make a truthful disclosure can amount to charges of perjury and bankruptcy fraud.