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Asset Protection: Not Just for Scam Artists

By Joe Price from the MO Planning Business & Estate Planning Blog

Years ago, when I was not in charge of the Tax and Estate Planning Department in the law firm where I worked, I suggested to the department head that our firm should purchase a reference book on Asset Protection Trusts, which was a new area of law at the time.

The department head scowled at my request and told me that “our clients don’t need asset protection.”

A few years later, after the full brunt of the Tax Reform Act of 1986 had crushed some of those clients who had recently been identified as real estate moguls, it became clear to me that one never knew when the time was right to protect assets. On the other hand, it was fairly easy to figure out when it was too late for asset protection to be effective: When the act had taken place that was going to lead to a lawsuit, it was too late to do anything.

Why is that? Because many of the laws that will determine whether asset protection devices are effective or not turn on whether the transfer of assets was done in order to avoid, evade or delay creditors.

The above-mentioned Tax Reform Act of 1986 came out of the blue. Our clients were big-time operators in the world of shopping centers, office buildings, apartment complexes, real estate lending and the like. They had no advance warning that the Tax Reform Act would limit an individual’s ability to write off paper losses from real estate investments to the extent that it did. When the Tax Reform Act hit, it began a slow-motion train wreck that adversely affected every real estate investor that we worked with.

The fact is that you very seldom know what occurrence or series of events will cause you to need asset protection. However, if your planning isn’t in place when the financial “dominoes” begin to fall all around you, it is probably too late to do anything that will improve your situation.

Let’s list a few things that could cause you to face financial ruin unexpectedly:

  • A family member’s health care emergency that is not fully covered by insurance.
  • An unexpected ice storm that ruins the HVAC at a construction site that has not been properly weatherproofed.
  • An automobile accident that an employee or a child is involved in for which you have liability.
  • A sexual harassment claim made by one of your employees against a supervisor whom you have warned in the past but have not terminated.
  • The collapse of the price of oil (or some other commodity) which ruins the credit of a co-investor, which causes your borrowing group to violate a financial covenant with the lender, which causes the lender to call your loan prematurely.
  • A lender forecloses on a debt of which you are a co-guarantor with several other well-heeled people. The liability is joint and several and the lender decides to pursue you but nobody else. You know that you can eventually pursue the co-guarantors but you find out too late that they have all created asset protection devices while you were fighting with the lender.

So let’s assume that one of these tragic occurrences hits close to home and convinces you to take some steps to shield your assets from creditors. What can you do, and more importantly, what can you do that won’t disrupt your lifestyle or break the bank?

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