What Is Asset Protection Planning?

Asset protection planning is the use of legal structures — trusts, business entities, exemptions, and other tools — to protect your assets from creditors, lawsuits, and judgments. Done properly and in advance of any claim, asset protection planning is entirely legal. Done improperly or after a claim arises, it can constitute fraudulent transfer — a serious legal problem.

The goal of asset protection planning is not to hide assets or evade legitimate debts. It is to structure ownership of assets in ways that make them difficult or impossible for a future creditor to reach.

Who Needs Asset Protection Planning

Asset protection planning is most important for individuals with significant exposure to personal liability. This includes physicians, surgeons, and other healthcare professionals with malpractice exposure; attorneys and other professionals in private practice; real estate investors and landlords; business owners with personal guarantees on business debt; and high-net-worth individuals generally.

The critical timing rule: asset protection planning must be done before a claim arises. Transferring assets after you are sued — or even after you know a lawsuit is coming — is fraudulent transfer and can be unwound by a court.

Primary Asset Protection Tools

Irrevocable trusts — assets transferred to an irrevocable trust are generally beyond the reach of the grantor's creditors because the grantor no longer owns them. Domestic asset protection trusts (DAPTs) are available in about 20 states and allow the grantor to be a discretionary beneficiary while still achieving creditor protection.

Offshore trusts — trusts established in certain foreign jurisdictions offer strong creditor protection, though they carry significant cost and complexity.

Limited liability companies — business assets held in properly structured and operated LLCs are generally protected from personal creditors of the members, and personal assets of members are generally protected from business creditors of the LLC.

Retirement accounts — 401(k) plans and IRAs receive significant creditor protection under federal and state law. Contributing to retirement accounts is one of the simplest and most accessible forms of asset protection.

Homestead exemption — most states protect a homeowner's primary residence from creditors up to a certain value. Florida and Texas have unlimited homestead exemptions — a significant planning tool.