Characteristics of Effective Asset Protection

Liability Insurance
Having adequate insurance is the first line of defense in asset protection planning. Therefore, it is critical that you have your insurance reviewed by an expert. The goal is to transfer the liability exposure to the insurance company. However, sometimes insurance will not cover a particular claim or the policy limits are too low to satisfy the judgment. This is why it is important for you to have an asset protection plan in place as a second line of defense.

What you do not own cannot be taken from you.

Generally, if you do not own an asset, then your creditors will be unable to reach the asset unless they can show that your transfer of the asset violated a state fraudulent conveyance statute. Transfers that are shown to have estate-planning purposes, such as equalizing an estate between a husband and wife, are less likely to be treated as fraudulent conveyances than transfers without a separate estate-planning purpose.

One particularly useful asset-protection strategy involves the use of limited partnerships and limited liability companies to hold a portion of your assets. Even if a creditor is successful in obtaining a judgment against a limited partner or member, the creditor should not be able to access the assets of the partnership or LLC to satisfy the claim. The creditor should only be entitled to a charging order which would give him the right to receive the distributions that the debtor would have been entitled to. If no distributions are made, then the creditor gets nothing. This acts as an incentive for the creditor to settle the claim at less than the amount of the judgment. Note: Single member LLCs may not provide the same degree of protection as an LLC with multiple members.

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