Asset protection is the concept of and strategies for guarding one’s wealth. Asset protection is a type of financial planning intended to protect one’s assets from creditor claims. Individuals and business entities use asset protection techniques to limit creditors’ access to certain valuable assets while operating within the bounds of debtor-creditor law.
Asset protection helps insulate assets in a legal manner without engaging in the illegal practices of concealment (hiding of the assets), contempt, fraudulent transfer (as defined in the 1984 Uniform Fraudulent Transfer Act), tax evasion or bankruptcy fraud. Experts advise that effective asset protection begins before a claim or liability occurs since it is usually too late to initiate any worthwhile protection after the fact. Some common methods for asset protection include asset protection trusts, accounts-receivable financing, and family limited partnerships.
BREAKING DOWN Asset Protection
If a debtor has few assets, bankruptcy may be considered the more favorable route than establishing a plan for asset protection. If significant assets are involved, proactive asset protection is typically advised. Certain assets, such as retirement plans, are exempt from creditors under United States federal bankruptcy and ERISA (Employee Retirement Income Security Act of 1974) laws.
In addition, many states allow exemptions for a specified amount home equity in a primary residence (homestead) and other personal property such as clothing. Each state in the United States has laws to protect owners of corporations, limited partnerships (LPs) and limited liability corporations (LLCs) from the entity’s liabilities.