The Best Asset Protection Is NOT Asset Protection

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The Best Asset Protection is NOT Asset Protection
Too many physicians over the last 20 years have sought cookie-cutter asset protection plans to give them some “peace of mind.” While we admire these Doctors’ commitment to proactively managing their risk, we have to remind the Doctors we speak with that all “asset protection plans” are not created equal. In fact, many of these “plans” will not work if they ever are tested. Why is this? Essentially, it is because of a basic tenet of asset protection: for any asset protection plan to truly stand up to a challenge, it must have economic substance.
Looking at it from a different viewpoint, superior asset protection planning would involve tools that are primarily used by people for non-asset protection purposes. In this way, the best asset protection plan involves tools typically not thought of as “asset protection tools”; instead, they are “business planning tools.” Stated another way, “the best asset protection is not asset protection.”

 

Similar To Tax Planning
While few physicians realize this crucial fact of asset protection planning, leading attorneys in the field know it quite well. In fact, we are not alone, as tax attorneys and CPAs know this adage is just as true when it comes to tax planning.
Simply put, when determining whether or not a particular transaction with significant tax benefits was an illegitimate tax shelter or not, the IRS or tax court typically uses a simple test: “Would a taxpayer have done this deal if not for the tax benefit?” In other words, they are asking whether or not this transaction was simply done to save taxes or if it had another economic purpose. If there was such a purpose, the transaction stands. If the transaction was only tax-motivated, it fails.
This same test applies when evaluating whether or not a credit protection tactic will be upheld if ever challenged down the road. Here, the question is “did this transaction have an economic purpose, or was it simply done for asset protection purposes?” If you are using tools that millions of Americans use on a daily basis for non-asset protection purposes, you can convincingly answer yes.

 

Young couple on waterWhy This Is So Important
Over the last decade, many courts throughout the U.S. have become increasingly frustrated with “asset protection planning.” Reading judges’ decisions in this area, it is obvious what has created their frustration—the prevalence of firms marketing themselves as “asset protection” experts, promoting the idea that the judgments of U.S. courts can be frustrated by their planning. Is this surprising? No. Of course judges are not going to be happy about an area of planning that is designed to circumvent the execution of a judgment that their court rendered, and prevent a successful plaintiff from getting paid on a judgment.
The courts’ frustration is most severe when the defendant has made transfers or engaged in transactions that seem “fishy,” even if the transaction at issue was made well before the beginning of the lawsuit process. If the transaction comes too late, the judges can resort to remedies to undue “fraudulent transfers.” However, even in cases where the transaction came well before any plaintiff’s action, we have seen judges strain to circumvent the asset protection planning.
In fact, there are certain cases where courts have given more leeway to a claim of fraudulent transfer based on a “foreseeability” argument. On the logic of one particularly noteworthy case, a medical malpractice case could always be seen as “foreseeable.” Taken to its logical conclusion, this position could support the argument that a Doctor who does procedures daily is aware of the possibility of mistakes. If this were true, a plaintiff suing a Doctor could attack asset protection transfers made years prior to the case.
By using “non asset protection” asset protection, you are not as vulnerable to this emerging trend in the law. The techniques explained in this chapter do not involve “transfers” at all. Given this, and “non asset protection” techniques with tangible and concrete economic substance, these tools and tactics are certainly among the strongest protection you can implement for the long term.

 

Asset Protection That Isn’t
The best asset protection tools were not created as asset protection tools. They are tools that have other primary benefits and offer outstanding creditor protection as a secondary benefit. Which asset protection tools are not asset protection tools? Let’s examine a few of them briefly here. They will all be developed further in other parts of the book.

 

Qualified Retirement Plans
The term “qualified” retirement plan means that the retirement plan complies with certain Department of Labor and Internal Revenue Service rules. You might know such plans by their specific type, including pension plans, profit sharing plans, money purchase plans, 401(k)s or 403(b)s. Properly structured plans offer a variety of real economic benefits: you can fully deduct contributions to these plans, and funds within them grow tax-deferred. In fact, this is likely why most medical practices sponsor such a plan. Keep in mind that distributions may be subject to tax and a 10% penalty if withdrawn prior to age 59.
What you may not know is that under federal bankruptcy law and nearly every state law, these plans are protected against lawsuits and creditor claims—enjoying (+5) protection status. Yet the overwhelming majority of millions of Americans who use qualified plans are not using them for asset protection purposes. This, then, is a great example of an attractive economic tool that just so happens to have tremendous asset protection benefits as well.

 

Non-Qualified Retirement Plans
Non-Qualified plans are relatively unknown to physicians, even though most Fortune 1000 companies make Non-Qualified plans available to their executives. These types of plans should be very attractive to physicians, as employees are not required to participate and allowable contributions can be much higher than with qualified plans, although not deductible. Once again, Non-Qualified plans are generally not used for asset protection purposes, but they may have such benefits. Read more about More

The Sliding Scale Of Asset Protection

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Asset Protection

The Sliding Scale of Asset Protection
The most common misconception among Doctors regarding asset protection is the idea that an asset is either “protected” or “unprotected.” This “black or white” analysis is no more accurate in the field of asset protection than it is in the field of medicine. In fact, asset protection advisors are very similar to physicians in how they approach any client or patient. In this chapter, we will discuss the way in which advisors measure a client’s assets by using a sliding scale. Then we will suggest ways in which Doctors can protect assets, avoid high-risk assets and achieve a high level of protection.

The Sliding Scale And ScoresAsset Protection
To measure the assets of a client, advisors use a sliding scale that indicates the client’s “good” and “bad” financial habits. Like Doctors, asset protection professionals will first try to get a client to avoid “bad habits.” For a medical patient, bad habits might mean smoking, drinking too much or maintaining a poor diet. For a client of ours, bad habits might include owning property in their own name, owning property jointly with a spouse or failing to maximize the percentage of exempt assets in an investment portfolio.
Like a Doctor who judges the severity of a patient’s illness, asset protection specialists use a rating system to determine the protection or vulnerability of a client’s particular asset. The sliding scale runs from-5 (totally vulnerable) to +5 (superior protection). As you have probably already guessed, our goal is to bring a client’s score closer to (+5) for each of their assets.
When most clients initially come to see us, their asset planning scores are overwhelmingly on the negative side of the scale. The reason for this score varies. Typically, personal assets are owned jointly (-3) or in their individual name (-5). Both of these ownership forms provide little protection from lawsuits and may also have negative tax and estate planning implications. More