Protecting Assets From Creditors

Clients should shield assets from potential creditors before they become indebted because attempts to shield assets after a client becomes a debtor will be considered a “fraudulent conveyance.” Ten asset protection techniques clients can utilize prior to becoming debtors are below:

1. Convert non-exempt assets into exempt assets to protect them from future creditors.
2. Purchase life insurance to protect assets from estate taxes and provide for family in the event of death.
3. Purchase liability insurance to pay creditors in the event of a lawsuit and to pay for a majority of the legal fees associated with a creditor suit.
4. Invest in a Qualified Retirement Plan to shield assets and, typically, receive a tax deduction for contributions.
5. Fund a Spousal Gift Trust to protect trust assets from creditors and estate taxes while still maintaining control and use of the assets.
6. Create a Family LLC or Family LP and put investments in the entity to shield them from creditors in the event of a lawsuit.
7. Some states do not distinguish between self-settled and non self-settled trusts. States that do not make the distinction allow settlors to fund self-settled trusts and still retain creditor protection.
8. Create a Captive Insurance Company that receives insurance payments. If structured properly, the premiums are tax deductible and can be transferred to an irrevocable trust  later on.
9. Purchase Variable Life Insurance and invest the policy’s cash value in a tax-free environment. The policy holder can take out a loan against the insurance policy, reducing the value of his estate for tax purposes.
10. Fund an Offshore Asset Protection Trust. The trust assets are shielded from creditors, and offshore jurisdictions give settlors more opportunities to access assets in the event of a lawsuit.

See Ward J. Wilsey, Asset Protection in Uncertain Times, NuWire Investor, Jan. 17, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.