“One of the great responsibilities that I have is to manage my assets wisely so that they create value,” said Alice Walton, the daughter of Sam Walton, the founder of Wal-Mart. One of the key concepts of asset management is asset protection. Your assets will be able to grow only if they’re protected.
If you legally protect your assets, you can take them with you through difficult situations, such as claims from creditors, lawsuits, and bankruptcies. Quest Education can show you how.
What is Asset Protection?
Asset protection is the idea of guarding your wealth and the methods for doing that. You’ve worked hard to build your assets, but protecting them shouldn’t be hard. You just need some key techniques that will limit access to your assets, especially to protect them from creditors.
Asset protection is best done legally. Quest Education doesn’t advise any kind of illegal concealment of assets, fraudulent transfers, contempt of court, tax evasion, or bankruptcy fraud. Any of those can result in jail time.
Debtor-creditor law gives you many options for asset protection that are very effective. Some of the common proactive methods include:
Retirement accounts, such as a 401(k) or IRA, which are protected by US law
Family limited partnerships
Asset protection trusts
Accounts receivable financing
Joint ownership of real estate
Professional and liability insurance
Advisors can also help you use state laws that protect a portion of the value of your home equity and personal property. Those laws can also protect you from your business’s liabilities. You can learn more about this from Quest Education.
Why Asset Protection is Important
A wise person doesn’t assume trouble will never happen to him or her; instead, wise people prepare for trouble. You can be surprised by problems you would never have predicted, like a lawsuit you never even thought of. No one knows everything that might happen.
With asset protection, you prepare during good times for bad times that could happen. If a lawsuit, bankruptcy, or aggressive collection happens, you can get through it with wealth saved for the future.
People whose businesses or professions are most open to lawsuits are usually the ones most concerned about asset protection. Certain types of medical professionals worry about it a lot. However, other types of workers and businesspeople can have their assets attacked. Everyone should have the appropriate amount of asset protection.
How to Use Asset Protection
Besides the specific techniques of using retirement accounts, partnerships, trusts, and so on, it’s important you know some broader ideas of asset protection, which we’ll explain below.
Plan Asset Protection Before a Creditor Claim
When a large creditor claim is brought against you, your asset protection plan should already be in place. If you make any moves to protect your assets at that point, your actions could be called “fraudulent transfers.”
Your actions could be questioned even if you made these moves right before you were actually served a demand letter. A court could decide you were trying to avoid a legitimate claim. A judge could order you to pay for the creditor’s legal fees and might not let you discharge that debt in bankruptcy.
Assume That Your Private Actions Will Become Public
You should assume a court or creditor can find out about your whole asset protection plan and the reasons behind it. If your plan relies on secrecy, it probably won’t work. Secrets get out through sources ranging from tax returns to disgruntled employees.
Creditors are motivated, and they know a lot about their profession. Plus, penalties for anything less than full disclosure can be severe. You might be denied bankruptcy protection and could be charged with perjury or fraud.
Keep Your Plan Simple
If your advisor creates an asset protection plan that you don’t understand, that could put you in danger. If you’re ever questioned in a legal proceeding and can’t fully explain your own plan, that can raise suspicions against you. It could even be grounds for allowing creditors more access to some of your assets. Use simple asset protection plans, such as putting money into a trust for your children.
Give Up Some Control of Your Assets
A good asset protection plan will give you just enough control so you can use assets when it’s appropriate, and it will take away some control. If you have too much control of an asset, a creditor might convince a court that you and your asset protection plan are the same entity. The court could then ignore your plan, and let a creditor attack your assets.
For example, you shouldn’t try to hide your personal assets in a business entity, such as your corporation. Corporate entity laws are meant to help businesses operate, not to protect personal assets. Instead, you could legally set up and properly fund a trust to protect your assets, along with your family’s assets.
Did you know?:
IRAs and 401(k)s are protected from bankruptcy.
401(k)s are protected from bankruptcies, creditors, and lawsuits.
IRA owners (or other disqualified persons) who do engage in a prohibited transaction with an IRA, the tax consequences are severe.
The “standard” rule under IRC Section 4975(a) is that if a prohibited transaction occurs, there is a penalty tax of 15% of the amount involved in the transaction, imposed on any disqualified person engaged in the prohibited transaction.
If the prohibited transaction isn’t promptly unwound/corrected within the current tax year, the penalty tax is increased to 100% of the transaction amount.
Unrelated Business Income Tax (UBIT) in the U.S. Internal Revenue Code is the tax on unrelated business income, which comes from an activity engaged in by a tax-exempt 26 USCA 501 organization that is not related to the tax-exempt purpose of that organization.
There are Unintended Tax Consequences of Unrelated Business Income. (Download More Information on UBIT)
One of the great responsibilities that I have is to manage my assets wisely, so that they create value.
-Alice Walton, daughter of Wal-Mart founder Sam Walton