Protecting personal assets: what estate planners need to know.

• Author: Nardone, Vince

No matter the profession or business activity of your clients, they have no doubt become increasingly wary of the risk of potential personal liability. With the passage of federal and state legislation such as the Sarbanes-Oxley Act of 2002, business men and women are recognizing the liability consequences inherent in these efforts to allay public and governmental concerns about fair business practices. Such legislation, and the recognition that our justice system is unpredictable and sometimes unfair, has directly contributed to increased personal liability concerns in the business world. Soaring medical malpractice insurance premiums and the increasingly high jury awards in medical malpractice cases raise similar personal liability concerns for physicians. For these reasons and more, clients from all walks of business are considering non-traditional means that go beyond insurance to protect their personal assets from potential future creditors: a practice commonly known as "asset protection."

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Asset Protection on the Up-and-Up

Before discussing certain asset-protection strategies, it is important to understand what asset protection is not. Asset protection is not based on hiding assets, is not a means to defraud creditors, and it certainly is not a vehicle for evading the reporting and payment of taxes. There are specific federal and state laws, such as fraudulent conveyance statutes, fraud statutes, and tax statutes, that prohibit and penalize this type of conduct. Recognizing and ensuring that neither the client, nor the client's professional advisor, fall prey to these pitfalls is a very important aspect of asset protection planning.

Asset Protection Concepts

The concepts discussed in this article are not all-inclusive and certainly do not address every advantage or disadvantage of a particular aspect of an overall asset protection plan. However, this list does highlight key strategies that may be helpful to a particular client. Prior to implementing an asset protection plan, clients and their professional advisors should carefully review client needs and circumstances to determine what planning is appropriate.

1. Federal Statutory Exemption. If a retirement plan is an "ERISA Qualified Plan," (1) the participant's assets in the fund are virtually totally protected against all creditors' claims. The ERISA anti-alienation and preemption provisions combine to make state attachment and garnishment laws inapplicable to...