Asset protection is the legal process of protecting your assets from the claims of creditors. Although it is often treated as a separate area of law, many aspects of this should be incorporated into other practice areas. For example, the Venn diagram of estate planning and asset protection has substantial overlap. This should be obvious since one of the goals of estate planning is to ensure your assets go to your heirs, not creditors. Therefore, you should consider asset protection as one element in your planning.
Estate Planning
In estate planning, you encounter asset protection all the time. These are also the most common strategies you think of when you’re thinking asset protection. Trusts and lifetime giving are great mechanisms for protecting your assets for future generations. What makes sense for you depends on what you own and where you want your assets to go when you pass away.
Business
Businesses are huge sources of liability. It obviously depends on you, your industry, and how you run your business, but liability is a part of business. Everything you do in your business to try to limit your liability is asset protection. From setting up an LLC and owning insurance to having exceptional contracts, you’re protecting yourself. However, it’s a lot deeper than that.
You can restructure how you own the business to protect yourself. Using an LLC or corporation is a good first step. However, you can go further. Having your company owned by a trust is a huge layer of protection. Separating out high risk assets from lower risk activities is another great strategy. For example, if you own several rental properties and a property management company, these should be separate companies. A slip and fall in your rental property shouldn’t bankrupt every part of your business. This is called segmenting, and if done right, can be wonderful.
Most businesses can contract most of their liability away. For example, if you run a printing company, you can make your clients indemnify and hold you harmless for any damages that result from misprints or copyright infringement.
Basically everything in business should be structured in the way to limit your personal exposure.
Asset Protection in Other Areas of Law
These aren’t the only areas of law where you want to limit your liability. Basically anywhere you have liability, you want to reduce it. For example, if you own a home, you’re liable for those things that happen at your home and in your yard. To help mitigate this, you get homeowner’s insurance, keep your yard safe, and generally keep your house secure. Beyond those things, some wealthier people keep their houses in LLCs or trusts.
You can also keep yourself uncollectable if your assets are worthless. This is a more advanced strategy. For example, you own basically no assets yourself, and you have liens on any assets you do own. It sounds suspicious (and it kind of is), but when you dive down deep, you find out the loan company with the liens is ultimately owned by the person who owns the home. That loan company is either an LLC or owned by a trust so that the loan company itself is also off limits from creditors.
All-in-all, asset protection is a super customized area of law. There’s no one strategy that works for every person. Usually you’ll have a combination of many different ones.