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asset protection
 
Asset protection is basically the placing of assets beyond the reach of future creditors. It incorporates traditional estate planning, which is the preservation and protection of assets for the benefit of one’s beneficiaries upon such person’s death as well as the preservation and protection of assets during the life of the person.

Asset protection should be a proactive, not reactive. In other words, planning should be effectuated to protect against future liabilities as opposed to existing liabilities. Asset protection does not include the hiding of assets, committing fraud or perjury, engaging in fraudulent transfers or evading taxes.

Traditional asset protection techniques include outright gifts or transfers to trusts. The downside to these types of techniques is the loss of control and loss of income generated by the asset. These can be accomplished onshore and offshore. To avoid the loss of control of the asset and loss of income associated with the asset, certain states, as well as certain foreign jurisdictions allow the creation of a self-settled trust, that is a trust where the settlor and beneficiary are the same. In other words one can create a trust and be the beneficiary of the trust and still avoid a creditor from reaching the trust assets. Although there are various state laws that allow the creation of a self-settled trust for asset protection purposes, there are currently no cases allowing a debtor to create a self-settled trust and avoiding the claims of creditors.

Another technique includes the creation of tenancy by the entireties ownership. Tenancy by the entireties is a special form of ownership between husband and wife where each tenant is deemed to own the whole asset. A creditor of one spouse would not be able to execute upon the property since the non debtor spouse is deemed to own the whole property.

Another technique includes the transfer of assets to a limited partnership (or limited liability company) in exchange for limited partnership interests. Under Florida law, a creditor of a limited partner or member may only obtain a charging order against the limited partnership interest or membership. Such creditor cannot actually execute against the interest. This will only entitle the creditor to share in the profits and losses of the partnership/LLC that are actually distributed. Since a limited partnership/LLC is a pass through entity for federal income tax purposes, it is possible that a creditor holding a charging order receives a Form K-1 reflecting the partnership’s income but actually receive no distribution from the partnership to pay for the tax.

Certain assets are exempt from creditors by state statute. For example, both the proceeds and cash surrender value of life insurance and annuities are exempt from the claims of creditors under Florida law. It is also possible that the annuity interest of a grantor retained annuity trust (GRAT) be exempt from claims of creditors. Individual retirement account and property that qualifies as homestead under Florida law are also protected. In Havoco of America, Ltd. vs. Elmer C. Hill, Supreme Court of Florida, Case No. SC 99-98 June 21, 2001, the Florida Supreme Court ruled that homestead acquired by a debtor with the specific intent to hinder, delay, or defraud creditors is not excepted from Florida’s constitutional homestead exemption.

 
 
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