Lawsuits are big business in the U.S. The ability to get justice for private transgressions and contract failures is essential to freedom. Unfortunately, all is not fair in our court systems. Some plaintiffs and their lawyers seek and receive unfair judgments against defendants. People with wealth are often targeted as defendants with ‘deep pockets’. Threatened litigation and unfair and enormous judgments can destroy a person’s life and legacy.
A specialty area of estate planning called ‘asset protection’ treats this issue. Two goals involved in setting up protection of your assets from lawsuits are (1) to make it appear that you have no assets to minimize being targeted in a gratuitous lawsuit, and (2) to prevent, limit, or hinder a plaintiff’s ability to seize your assets in satisfaction of a presumably unfair court order.
The usual approach in achieving these goals is the creation of one or more legal entities (trusts, corporations, limited liability companies, family partnerships, etc.) to shield your assets from your ownership or control, and thereby prevent or limit a winning plaintiff from seizing them.
These asset protection entities themselves fall into two general strategies:
Domestic 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 legal entities and jurisdiction place assets outside the reach of creditors and the U.S. court system.
Domestic asset protection: where the U.S. entity that controls or owns your assets provides you - the defendant or debtor - with a potential layer of protection from having those assets seized. By having separate entities: limited liability companies, family limited partnerships, personal residence trusts, etc., hold and own your assets; you have removed them from your ownership and obtained some insulation from your personal creditors. Under a court challenge, you would have statutory and case law supporting the legal entity’s claim to retain the assets. If that is the situation, then all 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 two to four 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.
Offshore asset protection seeks a similar scheme of protection; but the essential difference is that the assets are out of the jurisdiction of any U.S. court. The ability to seize those ‘protected assets’ is significantly reduced or nullified. If you are 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.
These articles were written by Javelin Marketing Inc and distributed by the publisher to educate members of his community. They are not intended to provide tax or legal advice and should not be relied upon for such. They are summaries of our understanding and interpretation of some of the current laws and regulations and are not exhaustive. Investors should consult their legal or tax advisor for advice and information concerning their particular circumstances.
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