If you consider the high costs of malpractice it is easy to see how important asset protection can be. If you own a business or you are likely to face legal judgments or many potential creditors, asset protection planning is very important. It is always better to be proactive when it comes to protecting your assets than engaging in damage control once it’s too late. But, more importantly, you need to know the most common mistakes to avoid in asset protection so that your plan will ultimately perform the way it should.
Mistake No. 1 – Assuming asset protection techniques are illegal
The first mistake many clients make is assuming that creating a plan to protect their assets must be illegal or underhanded. That simply is not the case. We are all free to arrangement our assets in the most advantageous way possible, as long as we do so within the confines of the law. Really, the only time that the issue of fraud arises is when it is clear that the purpose of the asset protection plan is to obstruct, delay or defraud creditors from collecting valid debts. The easiest way to avoid the appearance of fraud is to establish your asset protection plan before creditors’ claims arise.
Mistake No. 2 – Waiting until after a creditor makes a legal claim
Another common mistake clients make is waiting until a creditor has made action to protect their assets until after a problem comes up. The purpose of asset protection planning is to protect your property from future creditors. In order for asset protection planning to really work, it needs to be established long before any creditor claims arise or legal judgments have been entered against you. In other words, the best time to create an asset protection plan is when you are solvent and not currently facing any claims from existing creditors. The sooner you start planning, the more options you will have available to you.
Mistake No. 3 – Failing to recognize potential creditors
One part of asset protection planning that is often problematic for many clients is determining who is likely to be a creditor. If you are successful in determining who your creditors may be, you can plan for that and your plan will be more effective. In other words, if you can create a strategy for protecting against certain claims now, it will be easier to limit your exposure to those potential liabilities. Some common methods for avoiding liability, especially for business owners, include the following:
- avoiding high-risk real estate or other investments
- declining to loan cars, boats and other dangerous instruments to others
- avoiding joint ownership in dangerous instruments
- adding indemnification language to business contracts.
Mistake No. 4 – Neglecting to customize your asset protection plan to meet your needs
It may not seem like a big deal, but you should not simply use a protection plan that someone else used and recommends to you. While your friends or family may have good intentions, when it comes to asset protection, one size does not fit all. Much like general estate planning, asset protection plans should be crafted on a case by case basis. Not all protection strategies work with all types of assets. You should be careful in considering your planning options. A boilerplate plan is never a good idea.
Mistake No. 5 – Using the wrong type of trust to protect your assets
A common misconception among clients is that any type of trust will do for asset protection. That is not necessarily true. Revocable living trusts are not always the right type of trust for asset protection. Also, irrevocable trusts will only protect assets that are transferred to the trust, as long as there is no evidence of that the transfer was a fraudulent conveyance. In many states, when you fund property to a trust and you are a potential beneficiary, the assets will not be protected from creditors.
Mistake No. 6 – Not having a proper estate plan as well
When you create a protection plan the right way, you need to consider possible inheritances from relatives. This is an issue that is often overlooked. Those inheritances need to be structured so that they provide maximum flexibility and protection against creditors and divorce. Including inheritance planning and asset protection as components in your overall comprehensive estate plan is the way to go.
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