Asset protection

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Asset protection (sometimes also referred to as debtor-creditor law) is a set of legal techniques and a body of statutory and common law dealing with protecting assets of individuals and business entities from civil money judgments. The goal of all asset protection planning is to insulate assets from claims of creditors without concealment or tax evasion.[1]


Asset protection consists of methods available to protect assets from liabilities arising elsewhere. It should not be confused with limiting liability, which concerns the ability to stop or constrain liability to the asset or activity from which it arises.[2] Assets that are shielded from creditors by law are few (common examples include some home equity, certain retirement plans and interests in LLCs and limited partnerships (and even these are not always unreachable)). Assets that are almost always unreachable are those to which one does not hold legal title. In many cases it is possible to vest legal title to personal assets in a trust, an agent or a nominee, while retaining all the control of the assets. The goal of asset protection is similar to bankruptcy, and the two practice areas go hand-in-hand. When a debtor has none to few assets, the bankruptcy route is preferable. When the debtor has significant assets, asset protection may be the solution.[3]

Whilst the aforementioned use of Trusts will be of benefit in a number of cases the question of ownership can still arise, as although legal ownership may have been transferred to the trustees, beneficial ownership may still in many cases lie with the settler of the Trust. A Private Placement Life Insurance contract (PPLI),[4] can provide a greater degree of protection and privacy than most Trusts, and can also be integrated with an existing trust if necessary. Whilst Trusts may not be recognised in many Jurisdictions, Life insurance also has the advantage of being Multi jurisdictional.

PPLI can also add security to cash deposits as they can be legally separated from the assets of a bank to protect against ‘Bail Ins’, this is sometimes referred to as Crisis Deposit Assurance.[5] This is particularly relevant in cases where deposits are held that are higher than the normal Government Deposit Insurance limit (Usually €100,000 in Europe) or for longer term corporate deposits such as uninsured pension or provident funds.

United States legislation[edit]

United States federal bankruptcy laws and ERISA laws exempt certain assets from creditors, including certain retirement plans. All fifty states also have laws that exempt certain assets from creditors. These vary from state to state, but they often include exemptions for a certain amount of equity in a personal residence, individual retirement accounts, clothing, or other personal property.

All fifty U.S. states also have laws that protect the owners of a corporation, limited partnership, or limited liability company from the liabilities of the entity. Many states limit the remedies of a creditor of a limited partner or a member in an LLC, thereby providing some protection for the assets of the entity from the creditors of a member.

All fifty U.S. states provide some protection for the assets of a trust against the creditors of the beneficiaries. Some states allow asset protection for a self-settled trust (a trust in which the settlor or creator of the trust is included as a potential discretionary beneficiary) and some states do not.

Creditors have several tools to overcome the laws that provide asset protection. First, there are federal and state fraudulent transfer laws.[6] Today there are two bodies of fraudulent transfer law: the Bankruptcy Code and state fraudulent transfer statutes. Most states have adopted Uniform Fraudulent Transfer Act which defines what constitutes a fraudulent transfer. The UFTA and the Bankruptcy Code both provide that a transfer made by a debtor is fraudulent as to a creditor if the debtor made the transfer with the "actual intention to hinder, delay or defraud" any creditor of the debtor. Regarding the modifier "any" (creditor), Jacob Stein, author of textbooks on asset protection, divides the creditors into three classes: present, future and future potential creditors. While UFTA applies clearly to present creditors, the distinction between a future creditor and a future potential creditor is not as clear. The UFTA is commonly held to apply only to future creditors and not to future potential creditors (those whose claim arises after the transfer, but there was no foreseeable connection between the creditor and the debtor at the time of the transfer).[7]

There are also laws which allow a creditor to pierce the corporate veil of an entity and go after the owners for the debts of the entity. It may also be possible for a creditor of a member to reach the assets of an entity through a constructive trust claim, or a claim for a reverse piercing of a corporate veil.

The anti-alienation provision of the Employee Retirement Income Security Act of 1974 (ERISA) exempts from claims of creditors the assets of pension, profit-sharing, or 401(k) plans. Two exceptions are carved out for qualified domestic relations orders and claims under the Federal Debt Collection Procedures Act of 1990. Because the protection is set forth in a federal statute, it will trump any state fraudulent transfer law. Protection of ERISA is afforded to employees only and does not cover employers. The owner of a business is treated as an employer, even though he may also be the employee of the same business, as in a closely held corporation. Accordingly, ERISA protection does not apply to sole proprietors, to one owner business, whether incorporated or unincorporated, and to partnerships, unless the plan covers employees other than the owners, partners and their spouses.[8]

Asset protection planning requires a working knowledge of federal and state exemption laws, federal and state bankruptcy laws, federal and state tax laws, the comparative laws of many jurisdictions (onshore and offshore), choice of law principles, in addition to the laws of trusts, estates, corporations and business entities. The process of asset protection planning involves assessing the facts, circumstances, and objectives of an individual, evaluating the pros and cons of the various options, designing a structure that is most likely to accomplish all the objectives of the individual (including asset protection objectives), preparing legal documents to carry out the plan, and ensuring that the various legal entities are operated properly in accordance with the laws and the objectives of the individual. This process involves providing legal advice and legal work and most states prohibit the practice of law without a license.


  1. ^ Jacob Stein (Winter 2007). "The Importance of Trusts in Asset Protection". California Trusts and Estates Quarterly, Volume 12, Issue 4, p. 17-25. Retrieved September 24, 2010. 
  2. ^ Richard T. Williamson (2008). The Real Estate Investor's Guide to Corporations, LLCs & Asset Protection Entities. Kaplan Publishing. p. 43. ISBN 978-1-4277-9702-5. 
  3. ^ Jacob Stein (September 10, 2010). "McCourt Divorce Shines A Light on Asset Protection". Los Angeles Daily Journal. Retrieved September 27, 2010. 
  4. ^ FTA Cyprus
  5. ^ FTA
  6. ^ 11 USC § 548
  7. ^ Jacob Stein (August 2010). "Asset Protection May Risk Fraudulent Transfer Violations". Estate Planning. Retrieved September 27, 2010. 
  8. ^ Stein, Jacob (2011). A Lawyer's Guide to Asset Protection Planning in California. p. 80. ISBN 0-9839780-0-X.