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July 1, 2006

No matter how great or how humble, we all need to protect our assets from unanticipated liability situations. The most common exposure most of us share is from the daily operation of our automobiles. One unfortunate automobile accident could result in liability in excess of our insurance limits, thus exposing our hard‑earned assets to the collection efforts of a judgment creditor. You’ve probably read about jury awards which seem to make little, if any, sense in terms of being fair and adequate compensation.

Virtually everyone understands that they must protect the assets which they have accumulated and that they do so by taking certain fundamental precautions. Insurance is the first line of defense. whether it be homeowners, auto, general business liability coverage or other‑ forms of liability coverage. In addition to insurance, most business owners have organizational structures such as corporations and limited liability companies. These entities encapsulate the liability which arises as a result of the activities of the business.

When considering asset protection in the context of estate planning, we try to protect against liability that could arise as a result of a completely unforeseen set of circumstances. This could result from the automobile accident example or from an unfortunate business experience. Because these are”unanticipated events,” we generally cannot take adequate precautions to avoid the event or its consequences.

Asset protection, while not a new concept, is becoming increasingly popular in the context of estate planning. As part of the estate planning process, we consider the practical implications involved in setting up structures to provide protection. If the cost of setting up and maintaining these structures is prohibitive, then we have not accomplished the best possible result in our estate and asset protection planning.

The learned Supreme Court Justice Benjamin Cardozo in a famous case stated,‑The risk to be perceived defines the duty to be obeyed.” Paraphrasing this  thought, the asset protection concepts employed should be tempered by the reasonable probabilities of exposure. This determination must be done on a case‑ by‑ case basis.

There are many asset protection vehicles and concepts which can be employed without spending thousands of dollars on planning and maintenance. The business interests, risk tolerance and personal activities of each client will determine, to some extent, the asset protection devices which may be employed in order to give that client the best possible plan. A retired client may require less asset protection planning than a person actively engaged in a business enterprise. Insurance may be adequate for the retired client, however, more complex structures may be required for more active clients in order to provide sufficient protection.

Asset protection planning employs many different strategies and structures, starting with some of the most fundamental vehicles. For instance, married couples owning a home which is their principal residence can hold title to that property as “tenants by the entirety” which will result in protecting that asset from the judgment creditor of either spouse. Insurance values, some annuities, 401(k) programs and pension and profit sharing plans all have protection from creditors in the context of a bankruptcy. While most of us don’t consider bankruptcy as a pleasant prospect, we must keep in mind that this is “disaster planning.” Employing complex structures may be necessary where the potential for liability is greater, the client is less risk‑ tolerant and the asset values warrant the cost of creating and maintaining the structures which provide protection from judgment creditors.

Asset protection planning is not just for the very wealthy. Each individual and/or family should evaluate the need and then employ the means to provide sufficient asset protection so that the accumulated wealth will not be emasculated as a result of an unanticipated event.