Protecting Assets Is Not Only for the Wealthy

Offshore bank accounts and “asset protection” trusts once were money-hiding gambits preferred by financial criminals and con men. But in today’s environment of rising taxes and rapidly escalating litigation costs, more and more individuals are turning to asset protection tactics out of fear that their homes and bank accounts will be unjustly or unnecessarily swept away.

“We have seen a three-fold increase in business,” says Jay Mitton, partner at Mitton & Burningham in Newport Beach. While the strategies are now mainly popular with professionals--such as doctors, lawyers, accountants and financial planners--Mitton predicts that anyone with a home and income over $30,000 may eventually turn to asset protection in some form.

There are several reasons why these strategies are flourishing now, but one of the main reasons is litigation.

As the number of cases filed in federal and state courts has mushroomed, nearly everyone knows someone who has been sued, says Nancie Poulos, vice president and general manager of marketing for Montgomery Ward’s legal services division. One lawsuit is filed every 30 seconds in the United States, adds David Phillips, chief executive of Estate Planning Specialists in Chandler, Ariz. About one in every 10 adults gets sued each year, he adds. That is making even low-risk, middle-income Americans understandably nervous, Poulos says.

Meanwhile, jury awards that amount to more than $1 million have hit a record. And liability has been expanded to ensnare many people who previously would not be considered culpable, according to the Insurance Information Institute in New York. In some cases, litigants sue whomever has a “deep pocket,” experts say. And if you have a home, savings and insurance, that deep pocket could be you.

But asset protection techniques are also becoming more popular because of fears about rising taxes. The Clinton Administration has pledged to dramatically boost income tax rates on all but the poorest families. Many believe that estate taxes will also soar.

There are already proposals being bandied about in Washington that would dramatically curb your ability to give money to your friends and relatives--before and after death--without incurring estate or gift taxes, which can amount to more than 50% of the gift.

Estate planning has taken on some urgency because many experts believe that those who have plans set up before the changes are enacted will be “grandfathered”--or allowed to operate under the old rules. Those who do not probably will not, Phillips says.

What do estate taxes and asset protection have to do with one another? Everything.

While not all estate planning provides asset protection, all asset protection strategies provide estate planning benefits. They have to.

The reason for this is because of the best-known users of these techniques--crooks.

U.S. courts do not want financial criminals to manipulate the system to hide their assets from legitimate claims, so they generally void any technique that was used solely to protect assets from creditors and litigants. But they are hesitant to dismiss techniques that were employed for legitimate estate planning reasons.

The trick, though, is determining intent. And since sophisticated financial criminals can use the same techniques as legitimate businessmen, that is not easy to do. There are some rules of thumb, however.

For instance, if you try to put your assets out of reach of creditors while you are being sued or threatened with a lawsuit, there is a very good chance that the courts will determine you have engaged in something called “fraudulent conveyance” and unwind everything you have done. If you do it within a few years of filing bankruptcy, the same rule applies.

But if you employ these techniques years before lawsuits or creditor problems are on the horizon, and you can show that you have legitimate estate-planning concerns, the trusts and partnerships used to protect assets from creditors and taxes usually will hold up in court, Mitton says.

Still, while you could argue that nearly anyone could benefit from some form of estate planning, asset protection is not for everyone.

The strategies are highly controversial, largely because they still protect criminals and con men just as effectively as they protect everyone else. Additionally, they cost money--sometimes a lot of money--and they require that you give up a certain amount of control.

The main asset protection strategy is to give your assets away--usually to friends and relatives. Some strategies give you substantial control over those assets, but others do not. And in some cases, if you change your mind about who you want to give your money to, you are out of luck.

On the other hand, basic estate planning techniques, which provide little or modest asset protection, are typically simpler and cheaper to set up and maintain. And, usually, they can be altered right up to the day you die.

Determining which strategy is right for you requires some self-assessment--and probably some advice from a professional. But, generally speaking, the wealthier you are, the more you are likely to need more than a basic estate plan.