Understanding The Basics Of Asset Protection (Online-Only Article)
By Andrew D. Tucker November 2014Personal Finances Estate Planning
By: Andrew Tucker, JD, CFP®, MTWM
Asset protection is somewhat of an enigma: despite its popularity in the dental community, few advisors can properly communicate what asset protection actually means. In this two-part article, we first explore the basics of asset protection and, in our second installment, explore some valuable asset protection techniques for doctors.
Here’s what doctors should understand before implementing asset protection strategies:
1. Understand what asset protection is. Asset protection is a method to protect assets from the future claims of potential creditors. There are two primary ways to accomplish this feat. The first is through insurance; by accepting a small, known, and present loss in the form of an insurance premium, the doctor is able to protect against a potentially large and unknown loss later. The second way is by shifting control of assets away from the doctor, insulating the assets from being used to satisfy any number of future claims. Proper asset protection planning uses both methods so that, in the event of a future judgment creditor, assets are protected.
2. More important, understand what asset protection is not. Asset protection is not a loophole or technical trickery that can be used to protect assets in the final hours before a judgment is rendered or bankruptcy is filed. The federal bankruptcy court has a long history of dismantling complicated, last-minute asset protection strategies that were implemented to hide assets from creditors. Furthermore, all 50 states have fraudulent conveyance statutes that will unwind transactions carried out to defraud, hinder, or delay creditors. In all matters of litigation where the doctor has implemented asset protection strategies, the court will always evaluate the environment and time table in which transfers were made, which is why it is vitally important to…
3. Be proactive with planning. Asset protection is most effective when it is a state of mind, and proper contingencies are made well before the need arises. This begins with evaluating each major life and business decision through the lens of asset protection. Buying a new office building? Consider how you will title the building (personally, LLC, etc.) and what risks open you up to potential creditors. Having your estate planning documents drafted? Ask your attorney what techniques can be implemented that assist with asset protection goals. Have a son about to get his driver’s license? Talk to your insurance agent about your auto liability coverage and consider a personal umbrella policy. By responding to financial life changes with proactive asset protection measures, you can constantly limit your exposure to creditors with minimal impact on your daily life.
4. Diversity is key. Just as an investment advisor should not recommend that a client keep all of his net worth in one asset, the same is true for asset protection strategies. A balance of insurance, entity protection, trust arrangements, strategic asset titling, and qualified retirement assets (all discussed in our next installment) help to avoiding risk by depending on a single protection strategy. Even if a court strikes down one of these strategies, a well-diversified asset protection plan provides other so that the doctor has peace of mind knowing that all financial assets will not be consumed to satisfy a judgment.
5. Know the tradeoffs. The effectiveness of asset protection can be reduced to one simple principle: the more control retained, the more likely it is that creditors can attack the property. Too often, doctors believe that a strategy can be “put on paper” by signing various legal documents, and then conducting their financial affairs with no change as if the documents did not exist. If excessive control over assets is maintained, the court will undo transfers and the assets will be exposed to creditors. This principle is particularly applicable when using gifting programs, trusts, or family limited partnership arrangements. It’s important that all parties in an asset protection program stick to the fundamentals and uphold the integrity of any transfers and entities in order to preserve its legitimacy.
6. Understand your risk profile. A risk profile is the likelihood that your personal assets may be in jeopardy to creditor claims. To assess your risk profile, discuss the following with your financial and legal advisors: 1.) Is my practice mix considered high-risk (implants, sedation dentistry, etc.)? 2.) Do I have any high-risk obligations in the community (i.e. director of a charity)? 3.) Do I own any high-risk assets (airplane, race cars, etc.)? 4.) Do I have a high profile within my community? 5.) Do I have a history of being involved in litigation (public or private)? 6.) Do I own any intellectual property?
Answering yes to any of the above questions elevates your risk profile and merits a discussion with your advisor on plans to mitigate the risk.
7. Find the proper advisors. Many asset protection strategies are based in trust and corporate law, are highly nuanced, and require precise execution to be effective and avoid triggering catastrophic tax consequences. This requires advisors who are trained to handle both the legal and tax planning realms. The ideal advisor is a tax attorney who is also a Certified Public Accountant (CPA). Any advisor building your asset protection plan needs to have a fundamental understanding of the legal landscape as well as your personal financial needs.
* Andrew Tucker is an advisor with John K. McGill & Company, Inc. For more information on their tax and business planning services call 877.306.9780.
The McGill Advisory content is provided for informational purposes only and does not constitute legal, accounting, or other professional advice.
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