When a person is in desperate need of asset protection, it is too late to try to obtain it. Asset protection is only useful for someone if he or she has set it up before he or she actually needs it. No one will sell a person fire insurance for a house that has already burned to the ground!
Attorneys and other professionals involved in the area of assisting clients with the establishment of legal entities to protect the client’s assets, more often than not, find themselves engaged in a losing scenario where the client has come to them for help too late; they can offer none, legally. A typical example of such a conversation between a client in need of asset protection and the attorney would be that the client has been experiencing financial difficulties for some time and has reached a crisis point where threats of legal proceedings are being made, or have been made, to take the client’s personal assets, and therefore the client is contacting his financial planner to quickly transfer the ownership of his personal assets—the luxury sports car, the beach house, and the yacht—to a legal entity in order to avoid losing them in a court decision.
Timing is key and these types of conversations at a late point in time are out of place because by the time a client has reached a critical point of financial difficulty, the transfer of assets is no help; it is simply no longer possible. Any financial advisor who would assist the client at that point is most likely breaking one or more laws. Although it is perfectly acceptable to use asset protection tools to protect your assets, at a certain point in time asset protection could become illegal.
The area that exists between asset protection being legal or illegal is somewhat hazy. In certain circumstances, it may be clear that asset protection is legal and permissible. However, in other cases it may not be as obvious. The general rule is one cannot use asset protection to avoid paying an existing debt or claim. The risk is that the longer a person waits to decide to request asset protection, the closer the person gets to entering that hazy area between legal and illegal. Wait too long and it’s gone!
The use of asset protection tools to reduce the risk of loss forms a part of proper financial planning. The use of trusts, corporations, and private foundations to protect assets is beneficial and important because it helps individuals control their potential losses that might arise from their professional and business activities. But the client has certain legal responsibilities as well—he or she must at all times retain the ability to comply with and meet any current outstanding, financial obligations. If the client are unable to comply with an existing financial obligation and it can be proven that his or her asset protection plan was meant to avoid this payment, the creditor can apply to a judge to revoke the asset protection plan and confiscate all assets that have been illegally protected; all assets can be seized and sold to pay the creditor.
Although the law does not allow for you to use asset protection to evade a current debt, it does allow you to use asset protection strategies to avoid liability from future, unanticipated creditors. A distinction must be made between existing obligations and potential future, unforeseen obligations. Loans and other contracts entered into after an asset protection plan has been implemented do not pose a threat to the protected assets; if the plan is already set up before any verbal or written contact, discussions, or agreements, a creditor has no chance of going after those assets if there are financial problems that ensue. Of course, a creditor may try to go after the assets but as long as a debtor can show that he or she did not mislead the other party in any way, the assets are safe.
Even if a person has existing contracts and other financial obligations, he or she can set up an asset protection plan; one doesn’t have to wait to be free and clear of all contracts or financial obligations to do so. Even with existing contracts, as long as the client can document that there are no excessive debts, losses, fraud, or any other such financial issues that could lead to legal action or could threaten the person’s assets, one can set up the asset protection plan.
With asset protection, the key is the timing—avoid the danger that has not yet come!
