Tuesday, September 20, 2011

Establish asset protection when you don't need it

The down economy has significantly reduced the average American's discretionary income.  The effect is the consumer re-prioritizing where they spend their money.  Unfortunately, that has resulted in consumers sacrificing wiser, long-term beneficial expenditures in favor of short-term relief.  There are countless examples of this principle at work.  Choosing to forgo routine car maintenance will result in expensive repairs down the road.  Letting your expensive health insurance policy lapse to save money in the short term may result in incurring significant medical bills later.  Avoiding regular dental checkups can necessitate the suffering and cost of a root canal.

Another example of this is failing to draft and implement an asset protection plan before a claim against your assets arises.  When drafted and used correctly, the only real threat to assets inside of an asset protection trust are fraudulent transfer claims.  These are claims made by a creditor that assets were transferred to the trust to "hinder, delay, or defraud creditors."  Such claims will fail if the grantor can show that the transfers were made before a claim existed or the grantor had reason to know of a claim yet to arise.  That means that transfers to an asset protection trust need to be made while the waters are calm if the plan is to be completely effective.  this concept is sometimes referred to as 'seasoning' the trust.  The longer the time period between transfers to a trust and a claim against you, the more secure the trust assets will be.

If you think that one day such a claim might arise, then establish an asset protection plan now.  Funding an asset protection trust after events leading to litigation have already occurred will still provide you leverage in negotiations with  creditors.  However, you can't effectively transfer assets to a spendthrift trust unless the timing of those transfers is proper.  While avoiding the legal fees of creating an asset protection plan may boost your bank account a bit in the short term, if a judgment is found against you down the road, you'll be kicking yourself for not engaging in planning sooner.

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