Cart 0

Asset protection

Posted by John Reed on

This is about using various legal entities for the purpose of avoiding having to pay a lot of money if you lose a lawsuit. It is called “asset protection,” although I note that appears not to be a recognized legal specialty.

Here is how Investopedia (an investment, not a legal, site) defines it:

What Is Asset Protection?

Asset protection is the adoption of strategies to guard one's wealth. Asset protection is a component of financial planning intended to protect one's assets from creditor claims. Individuals and business entities use asset protection techniques to limit creditors' access to certain valuable assets while operating within the bounds of debtor-creditor law.


  • Asset protection refers to strategies used to guard one's wealth from taxation, seizure, or other losses.
  • Asset protection helps insulate assets in a legal manner without engaging in the illegal practices of concealment (hiding of the assets), contempt, fraudulent transfer (as defined in the 1984 Uniform Fraudulent Transfer Act), tax evasion, or bankruptcy fraud.
  • Jointly-held property under the coverage of tenants by entirety can work as a form of asset protection.

You ought to pay your debts

When I was an Army officer, I often had to deal with subordinates who were not paying a debt. In the Uniform Code of Military Justice, this is called “dishonorable failure to pay just debts.” The moral code I try to live up to is

  1. tell the truth
  2. keep your promises
  3. treat others as you wish to be treated

Number 2 relates to debts.

So step one of asset protection is recognizing that it would be immoral, illegal, and unethical to use any method to avoid paying a just debt. One exception to that rule is bankruptcy exemption planning.

Bankruptcy exemption planning

Investopedia says,

Understanding Bankruptcy

“Bankruptcy offers an individual or business a chance to start fresh by forgiving debts that simply cannot be paid while giving creditors a chance to obtain some measure of repayment based on the individual's or business's assets available for liquidation. In theory, the ability to file for bankruptcy benefits the overall economy by allowing people and companies a second chance to gain access to credit and by providing creditors with a portion of debt repayment. Upon the successful completion of bankruptcy proceedings, the debtor is relieved of the debt obligations that were incurred prior to filing for bankruptcy.”

So bankruptcy may seem a violation of paying your just debts. It is a deliberate, conscious exception contained in federal law. It is for circumstances where the situation is hopeless and it is considered best for all concerned—both creditor and debtor—to end the situation. Bankruptcy tries to let the debtor get a fresh start and pay the creditors as much as possible from liquidating the assets of the debtor, if any.

Although bankruptcy is a federal law, each state has its own list of exemptions. These are assets the bankrupt are allowed to keep. The creditors may not get them or force the sale of them and get the proceeds of the sale. Some are obvious like a workman’s tools so he can pursue his line of work after the bankruptcy. Also, a cheap car or the money to buy one so he can get to work.

But the state bankruptcy exemption lists vary wildly in their generosity to the bankrupt. The main example of that pertains to the homestead exemption. That is the amount of your principal residence equity that you can keep from creditors. It varies from a low of $25,150 to unlimited dollar amounts in DC and seven states. FL and TX are famous for being two of them.

You should consider moving to a state with more generous exemption list. Whether you do that or not, you should always take full advantage of your state’s entire exemption list. For example, in CT, a wedding ring is exempt. So get the most expensive wedding ring you can afford and put in your safe deposit box (to avoid losing it or being robbed of it) if you live in CT.

This is called exemption planning. It simply means getting your state’s list of bankruptcy exemptions and making sure you have the maximum allowed of each exempt asset. In 20 states, you can also choose the federal list which may be better for some people.

In my opinion, taking advantage of your state’s bankruptcy exemption list is the only moral, legal, ethical asset protection legal technique. The people in the business of selling asset protection hate anyone saying that.

I started to write a book on asset protection

When asset protection became a hot topic in the 1980s, I decided to write a book about how to do it. I am not a lawyer, but I already had written one very successful law book for laymen called Aggressive Tax Avoidance for Real Estate Investors. That book has sold over 100,000 copies and is now in its 20th edition.

However, as I began my research, I quickly ran into the fact that dishonorable failure to pay just debts is immoral, illegal, and unethical. The phrase used in the law is that you may not hinder or delay creditors from seizing your assets to collect money you owe them. The Bankruptcy Code contemplates several penalties for transfers made by a debtor with an intent to “hinder, delay, or defraud” creditors.

The law has quite clearly said you can take advantage of the bankruptcy exemptions to protect your assets, but that’s it.

Based on my research, all the other purported ways to protect your assets via some legal techniques are dubious.

Those techniques generally involve trusts or other forms of group ownership. Some involve putting money in a trust in another country that has very short statutes of limitation for suing there to collect from the trust.

In those legal techniques, they are not using a law that was created to prevent creditors from collecting from your assets like bankruptcy exemptions. Rather, they exist for other purposes but may have the by-product of hindering or delaying creditors in various ways.

Techniques include trusts, accounts-receivable financing, and family limited partnerships, corporations, limited partnerships and limited liability corporations, tenants by the entirety, and putting assets in your spouse’s name. Investopedia says, “Several states – including Alaska, Delaware, Rhode Island, Nevada, and South Dakota – allow asset protection trusts, and you don’t need to live in those states to take advantage of having a trust there.” I am not informed on those state trusts.

One lawyer website says, The best offshore jurisdictions for offshore trusts are, in this order, Cook Islands (about 2,600 miles northeast of New Zealand), Nevis, and Belize (east of Guatemala in Central America).

I have actually been to Nevis—on a cruise. And a guy I knew in the Army and then coincidentally as a classmate at Harvard Business School and afterward as working across the street from him in San Francisco lived there.

He went to jail and bankrupt. He had a home in FL that was exempt from the creditors in bankruptcy. I saw him at a recent HBS reunion. He told me he lived in St. Kitts. St. Kitts and Nevis is the name of a two-island Caribbean nation. Based on where he lived, that is at least one endorsement of offshore trusts, but I do not know that he used St. Kitts/Nevis successfully to protect assets. It might have been a belated attempt to do better next time.

That law firm suggested using a Cook Islands trust that owns a Nevis LLC. “Jesus H. Christ on a crutch” is my reaction. As you go about your daily life, the fact that you have that convoluted asset-protection scheme would occasionally come up with your banker, your lawyer, a mortgage lender. It makes you sound like some kind of nut or crook. Some may think it makes you sound sophisticated. But those who are sophisticated, like mortgage lenders, generally will refuse to do business with you or the offshore entity or require you to sign personally on the loan or get a co-signer. Some mortgage lenders will not even lend to a U.S. LLC.

‘Piercing the veil’

Creditors often can pierce the veil of an asset-protection entity like a corporation, LLC, or trust. That means they can get at the assets inside the entity. There are a number of standard arguments for that:

  • entity is the alter ego of the person being sued
  • the person being sued commingled the funds of the entity with his own personal funds
  • fraudulent transfer in anticipation of bankruptcy
  • debtor defrauded the creditor
  • to accomplish the specific legislative goal of a government benefit program that distinguishes between owners and employees

Becoming the owner of the ‘veil’

In some cases, the creditor does not pierce the corporate, LLC, or trust ‘veil.’ Rather, it becomes the owner of the entity and the veil becomes irrelevant.

Disadvantages of asset-protection devices unrelated to asset protection

Here is my article on LLCs which gives examples of that matter:

Share this post

← Older Post Newer Post →

Leave a comment

Please note, comments must be approved before they are published.