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Estate & Trust Blogs
Basics of Asset Protection
Entities & Structures and Why They are so Limited
Summary
This blog has a target audience of readers who are new to the concept of asset protection. This blog explains the three basic strategies for asset protect: (1) hide assets; (2) put assets out of reach; (3) fence off certain assets, meaning using entities to attempt to limit liability of certain assets to just the assets within certain entities; (4) obtain insurance to indemnify, which means pay for liability, instead of you; California Homeowner Exemption. The key takeaways from this blog should be that there is no “magic bullet,” meaning single strategy that completely works to completely protect your assets, instead, these strategies and techniques are costly and incomplete, each with its own downsides and administrative time and costs.
The most reliable way to protect assets is with an Irrevocable Trust. Tremendous caution is advised with the use of Irrevocable Trusts, the strongest device for asset protection, because the fundamental characteristic of Irrevocable Trusts is that the person who puts the assets into the Irrevocable Trust forever loses control over those assets. The easiest way to protect assets is with a 401(k), 403(b) retirement account or a 529 Education Savings Account. For those who are purchasing property or starting a business the combination of Limited Liability Companies, Trusts, and Fictitious Business Names may create security through obscurity as a means to hide identity. However, for all techniques other than a revocable trust, the reality is that a person may be forced to disclose the existence of such assets to satisfy a judgment.
Although the California Homeowner Exemption that protects, meaning after the bona fide liens, up the greater of $300,000 or the median home sale price in your county, not to exceed $600,000 must be paid to the homeowner upon foreclosure from, may be automatic, the burden is on the homeowner to prove the exemption if the Homeowner does not formally declare it by completing the , notarizing and filing the papers.
This blog expressly excludes any discussion of the details of (1) foreign techniques to hide & protect assets; and (2) moving assets after a liability has been incurred.
Key Takeaways
What is Asset Protection?
For purposes of this Blog Asset protection means use of techniques to prevent a judgment creditor from lawfully obtaining your assets to satisfy a liability. A liability means money that you legally owe to a creditor, after a lawsuit and that that creditor may collect through the various post judgment collection procedures.
Although this is a narrow definition of Asset Protection, properly structuring your assets can help discourage a potential plaintiff from seeking money from you through litigation.
What is a Debtor’s Examination and why it makes protecting assets so difficult?
This is because, in theory, literally everything that you own, or have control over disposing of and turning into money that you can use must be disclosed if properly asked about in an exam as a judgment debtor.
An is a procedure that a person who has won a lawsuit against you can use to identify assets to satisfy the money judgment. The judgment creditor is the person who won the lawsuit and has a judgment and order that you pay money, or a person who acquired those rights from that person. The judgment debtor is the person or entity that the Court has ordered to pay money. A can be conducted once every one hundred and twenty (120) days until the judgment is satisfied. Judgments last for ten (10) years, but, after ten (10) years can be renewed.
A is an oral interview during which the judgment creditor asks the judgment debtor and the judgment creditor answers the questions under oath. The scope of the question is any question that could reasonably lead to discovery of assets that could be used to satisfy the judgment. The may be reported, meaning a court reporter makes a verbatim transcript of the questions and answers.
Now, think of the following list of questions: (1) Have you ever had a checking account; (2) have you ever had a savings account; (3) have you ever had a CD; (4) have you ever had any savings bonds; (5) have you ever owned stamps; (6) have you ever owed any coins; (7) have you ever owned any artworks; (8) have you ever been a Member in any Limited Liability Company; (8) Have you ever been a shareholder of a corporation; (9) Have you ever been a beneficiary of a Trust; (10) Have you ever been a Settlor of a Trust; (11) Have you ever been the Trustor of any Trust; (13) have you ever been a partner in a partnership; (14) have you ever had any ownership in real property; (15) have you ever owned any intangible property; (16) have you ever owned any crypto currency; (17) have you ever owned any NFTs; (18) have you ever been a party to any contract that gave you anything of any value; (18) have you ever had a safe deposit box; (19) have you ever owned a safe; (20) have you ever owned any vehicles; (21) have you ever had any type of retirement account; (22) have you ever had any interest in a pension; (23) have you ever had a brokerage account: (24) have you ever owned any jewelry; (25) have you ever owned any precious metals?
Now, think of the derivative questions - who, what, where, when, how much......
I am not saying that the true and complete answers to those twenty-five questions and their derivatives identifies every asset under every situation, I am just saying that true and complete answers to those twenty-five questions and their derivatives identifies just above every asset under just about every situation. And in more time of a debtor’s exam, I would get most of the what those questions don’t.
Keep in mind, a judgment creditor can subpoena financial institution for all assets and accounts held in your name. Issuing a subpoena means that the judgment creditor gives the financial institution your name and other details, and that financial institution reveals every account that you have and how much money is n that account. So, if you lied or gave incomplete or incorrect information, you may now be subject to perjury....And yes, you can always say you didn’t understand, that was not the question asked......Again, how far are you willing to take this? How far do you think the Court will let you take it before the Judge gets angry?
Yes, there are thousands of banks and hundreds of brokerage accounts, and who knows how may crypto wallets of de-centralized finance platforms. But, approximately 20% of the institutions hold 80% of the assets, and approximately 5% of the institutions hold about 50% of the assets.
The point is, unless you are going to perjure yourself, and risk being prosecuted for perjury, hiding assets simply does not prevent a motivated judgment creditor from finding those assets.
Technique One: Hide Assets
What does hide assets mean?
What does “hide assets,” mean? Technically, hide assets means holding assets such that those assets do not appear on the public record. More broadly, hide assets could be interpreted to mean hold assets in such a manner that you may be able to avoid disclosing those assets during an exam as a judgment debtor.
How do you hide assets
Basically, you hide assets by titling those assets in trusts and limited liability companies that do not have your name attached to those entities.
What is a Limited Liability Company
A Limited Liability Company is a business structure that is relatively new, first created about fifty (50) years ago, under various state laws. Unlike a partnership, and in theory, only an LLC allows its owners to be immune from the liability of the LLC.
In most states, the minimum required paperwork requires that the owners of an LLC be identified on publicly available paperwork.
However, for a Limited Liability Company, Wyoming and New Mexico allow the Members, or owners of those companies to be excluded from the public record by naming a nominee or a third party as the manager of the entity. Wyoming has no state income tax, but the annual compliance of an LLC is more costly than in New Mexico. New Mexico has a state income tax, but LLC compliance is less costly. So, where the LLC may generate taxable income, Wyoming may be a better choice, but, where the LLC is not likely to generate any taxable income, New Mexico may be a better choice.
Note however, that all Limited Liability Companies are now required to file (”BOI”) Statements shortly after formation. So, ultimately, there will be a paper trail to your name - unless you are willing to flout that law too and risk a $591 daily penalty!
I have no information on whether FinCen the Federal Government entity that collects the BOI Statements responds to subpoenas, but I would hate to get caught outright lying stating I had no ownership of a corporation or LLC and then be confronted with a BOI report contradicting my sworn testimony.
What is a Trust?
A Trust a long-established entity where a person who owns assets gives legal title of those assets to a Trustee, who is obligated to protect and manage those assets for the benefit of the person who has beneficial or equitable ownership of those assets.
Trusts do not need to file BOA statements. However, the individual beneficiary must be named on the trust document. Sometimes, all a person needs is a certificate of a trust, but, the settlor is named on the certificate of trust. Depending on the circumstances, these documents may be required to be provided to financial institutions. In the long run, when the proper legal procedures are followed, most financial institutions will provide responsive documents under the subpoena power. One cold try naming an LLC as the beneficiary of a Trust, but that could get very, very complicated.
So, now that you know the entities used to hide assets, the point is simple, put the assets in the name of various entities. Viola! Your name is not on the record.
You still have the problem of the debtor’s exam, plus, one more problem.....if you owned the asset before, and there was a record of your ownership of that asset, a subpoena will reveal your name as the previous owner.
The simplest and best way to hide ownership of a new real property is to own that real property through a Wyoming Land Trust, where the trustee of the trust is an LLC domiciled in New Mexico or Wyoming and where the Member’s names are not on the public record.
What is a Fictitious Business Name?
In California, whenever a person or an entity is doing business using something other than that that person’s or entity’s legal name, that person or entity is required to (a) file a Fictitious Business Name Statement with the County where that person is doing business; (b) publish notice of that Fictitious Business Name in a newspaper of general circulation in the County where that person or entity does business; and (c) perfect the Fictitious Business Name Statement with the County by filing evidence of publication.
Modernly, here’s the catch and the opportunity....
What if the entity is a Trust? What if that Trust has an office / mail handling service in one county, far, far away from the County where that entity owns property or does business? What if that Trust had an attorney establish the mail handling service and file the Fictitious Business Name statement documents? Would all that be legal? It certainly would be difficult to identify the individual.
Technique Two: Put Assets Out of Reach
When I write put assets out of reach, I mean specifically that the person give up legal ownership of those assets; either through a revocable trust, a gift, or a 529 Education Savings Account. To a lesser extent a 401(k) or 403(b) retirement account can work, but only as to amounts that cannot voluntarily be withdrawn without penalty.
IRAs do not work to protect assets, because the Court performs a means test to see if such assets are available. So, a Roth Super Backdoor will not work to protect assets, and certainly entails complexity, if not a serious tax bill.
As described above, a trust is an entity whereby a person gives legal title of assets to a person called the Trustee whose fiduciary duty it is to manage those assets for the benefit of a beneficiary who has equitable title to the assets. If a Trust is made Irrevocable the Trustee, meaning the person who has legal title of the assets and is responsible for managing those assets must be a different person that both the person who gave the assets and the beneficiary. The transfer of assets is irrevocable, meaning once done cannot be undone.
Basically, an Irrevocable Trust makes is a permanent and irreversible transfer of assets to a third person. Yes, the settlor, the person who gave up the assets and who is seeking asset protection can be the beneficiary. But, as a practical matter, for the asset protection to withstand a legal challenge, that person must in actuality have no control over the assets.
Even if that does not discourage someone seeking asset protection, when the Trustee distributes assets or income to the beneficiary, that money or assets becomes available for protection.
It is very expensive to pay a person or entity to manage your assets for your benefit. Plus, once those assets are outside your control, you have very little legal ability to determine what happens to those assets.
There is a specific technique for 529 Education Accounts that I detail in my Blog on .
Technique Three: Fence Off Assets
The term fencing off assets means putting certain specific assets inside a single entity and in theory limiting the liability to just the assets inside that entity.
This may or may not function and it may or may not be cost & complexity prohibitive.
In the first instance, an LLC or a corporation is supposed to have a separate legal existence and therefore separate liability from its owners. However, if the LLC or a corporation is owned by just a person and the liability accrued is by an act or omission of that person, or the liability was a contractual liability requiring a personal guarantee, the individual is still liable. Once the individual is exposed to liability, all that individual’s assets, including any ownership in any other “fenced off” assets can be subject to collection.
Second, in California, the so-called corporate veil can be pierced. Piercing the corporate veil is a legal process to hold an individual business owner liable for the actions of a corporation or LLC that that individual owns. In California, the corporate veil can be pierced for at least three (3) reasons: (1) if the entity is undercapitalized; (2) if the entity serves as the alter ego for the individual, meaning the individual uses the entity as if it is just an extension of that person, frequently shown by referring to the individual and entity interchangeably, comingling entity and personal funds, failure to follow the corporate formalities; (3) fraud.
So, fencing off is definitely a solid technique and recommended for various situations, like persons owning multiple investment real estate parcels or multiple buildings.
However, it does come with a cost and additional complexity. Each LLC or corporation in California needs to pay at least $800 minimum tax. To the extent the entity is a corporation, or something other than a disregarded single member LLC, the entity would need to file an annual tax return. LLCs and corporations need to file annual updates with the Secretary of State.
Technique Four: Indemnification through Insurance
Indemnification means getting someone else to pay when you are liable.
The classic example of using indemnification is insurance. The basic benefits of liability insurance are that the insurance company will appoint and pay for defense attorneys and the insurance company may pay for liability, up to the coverage amount.
However, be advised that insurance will certainly destroy any anonymity that hiding your identity has achieved.
Furthermore, it is against California law on public policy to indemnify a person for one’s own intentional acts, so, any liability for intentional torts will not be protected against.
Moreover, as a practical matter, Insurance companies make money from collecting premiums, but not necessarily paying the correct amount for indemnification. To a certain extent, insurers do want to pay to defend and indemnify, because if they didn’t why would anyone buy insurance?
However, insurance companies want to reduce their losses and mitigate risks. So, with liability insurance companies almost always use the following techniques: (1) defend with a reservation of rights; (2) delay claims adjustment and burden the insured with administrative work; (3) seek contribution; (4) use the policies limitations and exclusions.
Defend with a reservation of rights means that the insurer agrees to defend, but does not promise to indemnify. This means that the insurer has not committed to paying the plaintiff and will not until later. What often happens later is that the insurer states that they are willing to pay some, if the policy owner pays some. If the policy owner refuses, then the insurer may claim they don’t have to pay anything. This situation is made worse for the policy owner, if the civil wrong has attorney fees, meaning the plaintiff can win the value of the attorney fees that it cost to obtain the money for damages, in addition to those damages.
Delay claims adjustment and burden the insured means make it time consuming and difficult to obtain indemnification, thereby encouraging no or only partial payouts.
Seek contribution means the insurer asks the insured to contribute. This was described above and frequently comes as part of a Hobson’s choice of bad choices. If the insured does not contribute, the insurer sometimes then argues that it is not obligated and won’t pay anything and the insured is taking all the risk. This frequently happens before trial to motivate the insured to settle.
Use policy limitations and exclusions means that insurance policies are complex and are written by attorneys using the cumulative experience of insurance companies at trial to maximize the insurer’s position and minimize the insured’s position.
Technique Five: The Homeowner Exemption
Under California law, a homeowner is entitled to the protection of a certain amount of equity in the home that is his or her principal residence (home). The protected amount is called the “homestead exemption.”
All homeowners automatically have a homeowner’s exemption, which protects part of their equity from involuntary sales, called foreclosures. Recording a declaration of ownership extends this protection to when sales are voluntary.
The protected amount as of the date closest to, but before the publication of this blog was the greater of $300,000 or the countywide median sales price for a single-family home, not to exceed $600,000. The homestead exemption does not prohibit the sale of the property. The property can be sold if the sale would produce enough money to:
Pay all existing liens that are secured by the property
Pay off all mortgages and loans secured by the equity in the home
Pay the costs of selling the home
Allow the homeowner to keep equity in the amount protected by the homestead exemption
There are two types of Homestead Exemptions:
Automatic Exemption: The Automatic Homestead Exemption applies only when the home is sold by foreclosure or deed in lieu of foreclosure. The automatic exemption requires continuous residence from the date the judgment creditor’s lien attaches until the date the court determines that the dwelling is a homestead. If a creditor attempts to sell the home, the burden of proof is on the homeowner to prove to the court that an automatic homestead exemption exists.
Declared Exemption: The Declared Exemption applies both to forced and voluntary sales of the property. Exempt proceeds from a voluntary sale are protected if another home is purchased within six (6) months. Homeowners must reside in the dwelling on the date the homestead declaration is recorded. If a creditor attempts to sell your home, the burden of proof is on the creditor to prove to the court that your homestead declaration is invalid.
Requirements
The homestead exemption applies only when certain requirements are met. These requirements, described in California Code of Civil Procedure (CCP) Section 704.710, are:
The residence must be the principal dwelling of the judgment debtor or his or her spouse. The judgment debtor, or their spouse, must reside at the dwelling on the date the judgment creditor’s lien attached.
The judgment debtor and/or their spouse must reside continuously thereafter until the date of the court determination that the dwelling is a homestead.
Eligible Properties
Homestead exemptions are available for a variety of dwelling types. “Dwelling” means a place where a person resides and may include, but is not limited to, the following:
Foreign Accounts and Trusts
Then there are the possibilities of foreign accounts and trusts. Well, if the country in which those accounts are located have a treaty with the United States, then there is a procedure where documents can be obtained.
Where there are no treaties, documents can be obtained, but often not in a practical time period with reasonable effort. However, those services are expensive. And the providers of those services are well-aware that they are outside the practical reach of the United States. They may not outright steal your assets, but, they are well aware of what you have any how much you must pay to secure those assets. Moreover, to those non-treaty countries, sometimes as a practical matter, those transfers are one direction only, because the assets cannot return to the United States.
Moreover, there are numerous United States reporting requirements for foreign assets that include FBAR, FACTA and Currency Transaction Reports.
Conclusion
People seeking a “magic bullet,” to asset protection are likely to be disappointed. There are many techniques that achieve partial benefits, but, nothing is perfect.
Each technique has its own complexity and cost. The best solution is unique to every situation and likely involves the use of 401(k)/403(b) accounts, 529 Education Savings Accounts, California Homeowners Exemption, and use of LLCs and Trusts. This author [almost] never recommends any use of Irrevocable Trust and if used, extreme caution is urged for anyone considering an Irrevocable Trust.
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