It is relatively easy to understand how important asset protection planning for Nevada residents can be. Most people want to make sure their assets are protected, including real estate, investments, business interests, and even personal property. Just consider the costs of malpractice, business (E&O), and other forms of liability insurance, which are rapidly increasing. It is certainly important to be preemptive in protecting your assets from potential creditors, whether that is through an insurance policy, homestead, or other asset protection plan. What may be even more important is understanding the most common mistakes in asset protection that Nevada residents should avoid.
There is nothing illegal about asset protection planning
One common mistake that many people make is assuming that there is something wrong with creating a plan to protect your assets. Many people feel like they are “hiding assets” or irresponsibly “sheltering” their estate from the reach of creditors. That simply is not true. We are all free to structure our assets in the most advantageous way available, as long as we do so properly and in accordance with the law. The only time that the issue of fraud is raised is when the purpose of an asset protection plan is solely to hinder, delay, or defraud creditors from collecting valid debts. The key is to create your asset protection plan before the creditors’ claims arise.
Make your plan before problems arise
Plan in advance! Another mistake that some individuals make is not taking action to protect their assets until after a problem has arisen. If you’ve already been sued (or if you know you’re about to be sued), it’s likely too late to effectively create a plan. The best and most effective asset protection planning is accomplished long before any creditor claims arise. The best time to start an asset protection plan is when you are solvent and not currently facing any threats from existing creditors. The purpose of asset protection planning is to protect from potential future creditors. The sooner you start planning, the more options will be available to you.
It can be tricky determining who may be a potential creditor
One aspect of asset protection planning that is difficult for most people is making a proper determination of who is likely to be a potential creditor. Those who are able to make this determination are better able to make an effective asset protection plan. It is easier to plan when you know exactly what you are planning for. In other words, if you can implement a strategy to protect against certain claims you can more easily limit your exposure to that liability. Some common ways to avoid liability, especially for business owners, include:
- avoiding high risk real estate and other investments,
- exercising extra care in hiring employees,
- refusing to loan cars, boats and other dangerous instruments to others,
- avoiding joint ownership in dangerous instruments, and
- including indemnification language in contracts.
Customize your asset protection plan to fit your needs
You cannot rely on an asset protection plan someone else used. Friends may be well-intentioned, but one size definitely does not fit all when it comes to asset protection planning. Not every protection strategy will work in every case. Any estate planning attorney will tell you – an asset protection plan needs to be developed on a case by case basis. Some people can effectively create an asset protection plan by taking advantage of legal protections under homestead, ERISA, business, and other federal and local laws; still others may need a more complex asset protection trust to deal with potential creditors. Individual needs must be carefully considered when choosing your planning options, so don’t use a boilerplate plan and hope that you will be protected. Most likely, you will not.
Make sure you create the right type of trust
Many clients have the same misconception, that any type of trust can provide asset protection. That is not the case. First, revocable living trusts do not provide protection for individuals who created the trust simply for that purpose. It is important to remember that, in most states, when the person who has funded the trust is a potential beneficiary, then the assets may not be protected from creditors. However, a properly drafted revocable living trust may be able to add asset protection for surviving spouses and/or other beneficiaries. An irrevocable trust can only protect property that is transferred to the trust as long as there is no evidence of a fraudulent conveyance, and a statutory period of time has passed before a creditor claim arises. Foreign offshore trust accounts have come under scrutiny in United States Courts, recently. Very special care must be given when implementing an asset protection plan that includes an offshore account.
The lack of a proper estate plan can be an issue
A part of asset protection planning necessarily includes consideration of possible inheritances from relatives, a factor that is often overlooked. Those inheritances must be structured, as well, in order to provide maximum flexibility, as well as, protection against creditors and divorce. An estate plan is a way for you to prepare yourself and your family for what happens after you pass away. An appropriate estate plan can also give you an opportunity to plan for unexpected incapacity. Regardless of how few assets you may have, planning for your family’s future is a necessity for everyone.
If you have questions regarding mistakes in asset protection, or any other asset protection planning needs, please contact Anderson, Dorn & Rader, Ltd., either online or by calling us at (775) 823-9455.