Asset protection is a financial planning component meant to safeguard your assets from lawsuits and creditors. It legally insulates your assets without having to engage in the unlawful practices of concealment, fraudulent transfers, and contempt. Legally protecting your assets also keeps you from participating in bankruptcy fraud or tax evasion.
The primary objective of asset protection is guarding against unexpected future claims, previously unfiled claims, or reasonably practicable claims. Protecting your wealth is important if you own stocks, real estate, and others. Discussed below are four tips for protecting your assets from lawsuits and creditors.
- Create a domestic asset protection trust (DAPT)
DAPT is an irrevocable trust where the assets transferred to it are held by the grantor and are protected from any of the grantor’s future lawsuits or creditors. Since there’s no limit to the assets you can transfer to and hold in the DAPT, you can make it a unique holding tool for personalized planning. Creating a DAPT provides multiple benefits, including:
- Creditor protection: Placing your assets in a DAPT establishes a legal shield that makes it hard for creditors to recover them in case of a financial claim or lawsuit
- Divorce protection: Creating a DAPT before the start of any marital troubles shelters the assets under the trust from possible division during divorce proceedings
If you intend to insulate your assets from possible creditor claims and lawsuits, consulting a skilled asset protection attorney from a trustworthy law firm, such as Blake Harris Law, can help you get personalized suggestions on the asset protection strategy that suits you best.
- Leverage the equity stripping strategy
Equity stripping involves taking out equity from an asset by adding a single or several liens or extra debt until little to no equity/ interest is left for the creditors to get. This strategy shields your wealth by making your assets less desirable and more difficult for creditors to lay claim to via legal action.
Protecting your assets using the equity stripping technique involves taking out a third-party loan where the lender gets priority interest in the assets. This lowers the assets’ equity, which in turn reduces asset worth and interest, eliminating the risk of creditors levying a legal claim on your wealth.
- Establish an offshore asset protection trust
An offshore asset protection trust is created outside your local jurisdiction and home country to shelter your assets from threats like lawsuits and creditors while making it harder for outsiders to learn about your wealth. For an offshore trust to effectively safeguard your assets, it should:
- Be irrevocable
- State the trust’s location
- Offer the trustee the discretion to hold payments from beneficiaries
- Certify the debtor as the grantor instead of the trustee
Some of the best offshore trust jurisdictions include the:
- Nevis trust
- Belize trust
- Bahamas trust
- Caymans Island trust
- Cook Island trust
- Form a legal liability company (LLC)
A limited liability company provides flexible taxation alternatives, asset protection, and, in some jurisdictions, insulation against lawsuits. When you establish an LLC, you’re forming a business entity that’s legally distinct from you, the owner. This separation offers limited liability protection. If your limited liability company cannot pay its debts, its creditors can’t go after your personal assets, only the LLC’s assets.
Endnote
Failure to shield your assets increases the possibility of being lost in bankruptcy, lawsuits, and other creditor activities. However, these tips can help protect your assets from lawsuits and creditors.