Asset Protection For the Uninitiated
by Shane Flait, ©2008
One specialty in financial planning is asset
protection. This relatively new area has grown
considerably over the last two decades. What’s
prompted this growth is the increased occurrence in
the U.S. of grossly unfair court judgments coming
out of kangaroo trials in the family (i.e. divorce)
court system. This is big business in the U.S.
Now I agree that the ability to get justice for
private transgressions and contract failures is
essential to freedom. But some plaintiffs and their
lawyers seek and receive unfair judgments against
defendants. The family court system is one way. But
additionally, people with wealth are often targeted
as defendants with ‘deep pockets’. They’re
continually threatened with frivolous lawsuits to
see how much they’ll settle for.
Threatened litigation, unfair, or enormous judgments
can destroy a person’s life and legacy. It can
relegate a person to a life of poverty - a form of
‘civil’ punishment for never doing anything wrong.
Two goals for setting up
protection of your assets from lawsuits are:
To make it appear
that you have no assets to minimize being targeted
in a gratuitous lawsuit, and
To prevent, limit,
or hinder a plaintiff’s ability to seize your assets
in satisfaction of a presumably unfair court order.
Legal considerations on
enforcement of a judgment
Judgments are enforced against
you in the country you reside. Other countries are
not required to enforce a U.S. judgment. The issue
must be re-filed in the new country and that country
must conclude that it wants to uphold the judgment
To force you to pay a judgment,
the court must find you have the ability to pay it,
and then it can enforce the judgment by seizing the
assets. If it believes – though clear evidence of
sorts - that you have the assets, but can’t find
them, it can seize you under contempt of not
delivering the assets.
The U.S. makes a distinction
between creditors. Your bankruptcy creditors have
limited claims against you. They cannot get access
to assets you have in certain qualified plans – such
as a 401(k) or and IRA. Creditors seeking child
support or alimony judgments have unlimited claim to
all your assets if need be. These judgments cannot
be forgiven by the court.
Often the these goals imply one
or more legal entities (trust, corporations, limited
liability companies, family partnership, etc.) to
shield your assets from your ownership or control,
and thereby prevent or limit a winning plaintiff
from seizing them.
Considering the asset protection goals and the legal
consideration above, asset protection entities and
strategies fall into two categories according to
Domestic strategies with any legal entities formed
within one of the states with favorable defendant or
debtor protection laws. Usually, these jurisdictions
permit the creation of barriers to a judgment
against the defendant or debtor.
Off-shore strategies with legal entities and
jurisdiction that place assets in a foreign country
- outside the reach of creditors and the U.S. court
asset protection, where the U.S. entity that
controls or owns your assets provides you – the
defendant or debtor - with a solid layer of
protection from having those assets seized. Under a
court challenge you’d have firm statutory and case
law supporting the legal entity’s claim to retain
the assets. Offshore asset protection seeks a
similar scheme of protection.
If the court finds that the entities you created are
simply a shield for you – or a sham of some sort -
and that you have control to take the assets as you
wish. Then the court can simply seize those assets
or order you to deliver those assets to the
Fraudulent transfer of your assets:
If the entities you created are valid, then the
court can decide is if you fraudulently transferred
your assets to this entity. If you did, then this
asset protection strategy will fail and your assets
will be seized.
A fraudulent transfer of assets is often considered
to have occurred if you transferred them within 2 to
4 years – depending on the state – of the time a
claim for those assets is filed. So you need
to transfer those assets long before any claim
against you is contemplated.
Enforcement of Judgment:
Here is where the ‘domestic’ location differs from
the ‘off-shore’ location strategies. The U.S. can
easily enforce its judgment for assets within you
U.S. since it has jurisdiction.
But the ability to seize those ‘protected assets’
when they’re outside the U.S. is significantly
reduced or nullified. If you’re ordered to produce
the assets –or its equivalent value – under a court
order and you refuse, then you can be seized under a
contempt of court order and jailed until you produce
them. Of course that’s if you are within the U.S.
The earlier you begin an asset protection strategy,
the better off you are. If no one knows you have
assets- all the better.
Shane Flait is a writer and educator. Get more info