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Protecting assets from lawsuits and creditors while saving income and estate taxes.

Preserving a client's wealth and hard earned dollars is becoming a great concern and a high priority in this litigious society. Many businesses and individuals who have failed to plan for potential financial difficulties by structuring their assets have found themselves wiped out almost overnight. The risk of exposure to potential lawsuits exists in every aspect of today's society, including: * Personal injury. * Lawsuits related to auto or home ownership. * Job-related lawsuits, including wrongful termination; breach of contract; malpractice; officer and director liability; workers' compensation. * Governmental agency exposure, including the IRS and state regulatory departments. * Divorce and remarriage. * Investment-related lawsuits. * Major medical illnesses or elderly care requirements.

The purpose of asset protection planning is to structure legally a client's wealth and assets in such a manner that they cannot be reached by lawsuits and/or creditors in the event of a large judgment (i.e., lawfully minimize one's exposure to the possibility of losing one's home, retirement, savings and other family assets) and, at the same time, save on estate and income taxes.

Protection planning strategies

In general, the following asset protection techniques are used in any plan and can also be used to save income and estate taxes. 1. Trusts: Transfers can be made to a trust that retains legal ownership of the property free from creditors' claims. 2. Pensions, life insurance and annuities: These assets are generally exempt from seizure by a creditor as they are protected under state exemption laws. 3. Mortgages and secured debt: Secured debt can be used as a technique to tie up the equity in one's property. 4. Marital property agreements: An agreement can be entered into that will shield at least one-half of the community (husband and wife) from being exposed in the event of a judgment. 5. Corporations: A corporation can be used to limit one's personal liability exposure. 6. Partnerships: A family partnership, if structured properly, is very difficult for a creditor to enforce a judgment against. 7. Donations and gifts: Transfers to children or third parties, if done properly, can place property beyond the reach of creditors. Note: Each of these techniques offers certain advantages and disadvantages from not only an asset protection standpoint, but also from a tax and estate planning standpoint. Obviously, tax and estate planning is also a large part of estate protection planning.

Protecting a business: Practitioners know that a client's business can be set up as a corporation to shelter their personal assets from liability. But many professionals are under the false assumption that a corporation will not shield a doctor, attorney, accountant, engineer and other professionals. In fact, the corporation shields professionals from everything except malpractice. Nonmalpractice claims such as accidents, employee wrongful acts and breaches of contract can be significant.

Taking business protection a step further, corporate business assets may be owned by a children's trust, and the trust may lease the assets back to the corporation. If the corporation is sued, the assets would not be vulnerable because the trust owns them. This arrangement could also save taxes if structured properly, with the lease payments qualifying as a business expense.

Protecting a home: Equity in a home can be a vulnerable asset. An individual who owns a home free of debt can protect it by taking out a mortgage and investing the proceeds in a retirement asset such as an annuity or insurance policy. Under state law, creditors may not be able to touch an annuity or insurance policy, and the home will no longer be vulnerable since it is tied up with a mortgage.


Structuring ownership of family and business assets to provide maximum protection from creditors makes good business sense. If possible, timely action before getting involved in financial or legal problems (as opposed to last minute transfers) makes it easier to withstand a challenge.

Advisers also need to be careful when counseling clients on asset protection. There are legal and ethical considerations to consider. While practitioners wrestle with the limits on what they can say to a client, there may also be issues of what they must say. It is not inconceivable to think that the failure to advise a client on asset protection strategies might one day be viewed as malpractice.
COPYRIGHT 1993 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Author:Miedaner, Randall M.
Publication:The Tax Adviser
Date:Aug 1, 1993
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